FORM 10-K
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ___________ to ___________
Commission File Number: 000-18464
Pennsylvania 25-1606091
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
612 Main Street, Emlenton, PA 16373
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(Address of principal executive office) (Zip Code)
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Registrant's telephone number: (724) 867-2311
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) YES [ ] NO [X].
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 March 14, 2005, was $32,161,481 ($28.25 per share average bid and ask prices of $28.25 and $27.50, respectively, based on 1,267,835 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 2004 (Parts I, II, and IV).
2. Portions of the Proxy Statement for the May 18, 2005 Annual Meeting of
Stockholders (Part III).
EMCLAIRE FINANCIAL CORP.
TABLE OF CONTENTS
PART I
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Item 1. Business..................................................................................................1
Item 2. Properties...............................................................................................17
Item 3. Legal Proceedings........................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................................18
PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities....18
Item 6. Selected Financial Data..................................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.....................18
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................................18
Item 8. Financial Statements and Supplementary Data..............................................................19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................19
Item 9A. Controls and Procedures..................................................................................20
Item 9B. Other Information........................................................................................20
PART III
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Item 10. Directors and Executive Officers of the Registrant.......................................................20
Item 11. Executive Compensation...................................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........20
Item 13. Certain Relationships and Related Transactions...........................................................21
Item 14. Principal Accountant Fees and Services...................................................................21
Item 15. Exhibits and Financial Statement Schedules...............................................................21
Signatures .........................................................................................................23
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PART I
Forward Looking Statements
Discussions of certain matters in this Form 10-K and other related year end
documents may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such,
may involve risks and uncertainties. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies, and expectations,
are generally identifiable by the use of words or phrases such as "believe",
"plan", "expect", "intend", "anticipate", "estimate", "project", "forecast",
"may increase", "may fluctuate", "may improve" and similar expressions of future
or conditional verbs such as "will", "should", "would", and "could". These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Corporation operates, projections of future
performance, potential future credit experience, perceived opportunities in the
market and statements regarding the Corporation's mission and vision. The
Corporation's actual results, performance and achievements may differ materially
from the results, performance, and achievements expressed or implied in such
forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, the local economy, the demand for the Corporation's products and
services, accounting principles or guidelines, legislative and regulatory
changes, monetary and fiscal policies of the U.S. Government, U.S. Treasury, and
Federal Reserve, real estate markets, competition in the financial services
industry, attracting and retaining key personnel, performance of new employees,
regulatory actions, changes in and utilization of new technologies and other
risks detailed in the Corporation's reports filed with the Securities and
Exchange Commission (SEC) from time to time. These factors and those discussed
under "Risk Factors" should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. The
Corporation does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
General
Emclaire Financial Corp. (the Corporation) is a Pennsylvania corporation and bank holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania through its wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the Bank). The Bank also provides investment advisory services to our customers and operates as Farmers Financial Services.
During 2004 the Bank entered an agreement with Blue Vase Securities, LLC to provide investment advisory services to our customers and operates as Farmers Financial Services. Blue Vase Securities, LLC is a nation-wide, full-service, independent broker/dealer that offers various services such as investments, insurances, wealth management, advisory services, estate and retirement planning and account consolidation. This partnership has enabled the Bank to provide our customers with financial solutions that extend outside the Bank's ordinary deposit products and services.
The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial property, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank operates through a network of ten retail branch offices in Venango, Butler, Clarion, Clearfield, Elk and Jefferson counties, Pennsylvania. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.
The Corporation and the Bank are subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank's chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956 (BHCA), as amended.
At December 31, 2004, the Corporation had $273.4 million in total assets, $23.6 million in stockholders' equity, $180.0 million in loans and $232.9 million in deposits.
Lending Activities
General. The principal lending activities of the Bank are the origination of residential mortgage, commercial mortgage, commercial business and consumer loans. Generally, loans are originated in the Bank's primary market area.
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 in market conditions and circumstances where this is advantageous in managing interest rate risk.
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 20 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 39.9% of the total loan portfolio at December 31, 2004. 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, operations 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. 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 that 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, 2004, the Bank's loans to one borrower limit based upon 15% of unimpaired capital was $3.1 million. At December 31, 2004, the Bank's largest single lending relationship had an outstanding balance of $4.8 million, which consisted of a loan to a municipality and was not subject to the legal lending limit. The next largest aggregate borrower had loans which totaled $2.8 million and consisted of loans secured by commercial real estate and business property in the Bank's lending area, and was performing in accordance with its terms.
Loan Portfolio. The following table sets forth the composition and percentage of the Corporation's loans receivable in dollar amounts and in percentages of the portfolio as of December 31:
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(Dollar amounts in thousands) 2004 2003 2002 2001 2000
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Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
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Mortgage loans:
Residential $100,858 55.6% $106,712 55.5% $101,585 59.4% $100,420 62.0% $ 92,429 60.9%
Commercial 48,539 26.8% 44,935 23.4% 34,986 20.4% 26,470 16.3% 24,661 16.3%
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Total real estate loans 149,397 82.4% 151,647 78.9% 136,571 79.8% 126,890 78.3% 117,090 77.2%
Other loans:
Commercial business 23,898 13.2% 26,470 13.8% 21,913 12.8% 20,806 12.9% 20,084 13.2%
Consumer 8,090 4.4% 14,142 7.3% 12,660 7.4% 14,308 8.8% 14,618 9.6%
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Total other loans 31,988 17.6% 40,612 21.1% 34,573 20.2% 35,114 21.7% 34,702 22.8%
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Total loans receivable 181,385 100.0% 192,259 100.0% 171,144 100.0% 162,004 100.0% 151,792 100.0%
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Less:
Allowance for loan losses 1,810 1,777 1,587 1,464 1,460
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Net loans receivable $179,575 $190,482 $169,557 $160,540 $150,332
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The following table sets forth the scheduled contractual principal repayments or interest repricing of loans in the Corporation's portfolio as of December 31, 2004. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.
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(Dollar amounts in thousands) Due in one Due from one Due from five Due after
year or less to five years to ten years ten years Total
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Residential mortgage $ 6,554 $12,340 $30,068 $51,895 $100,858
Commercial mortgage 4,816 22,230 16,862 4,631 48,539
Commercial business 9,891 6,183 1,885 5,939 23,898
Consumer 1,621 6,006 363 100 8,090
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$22,882 $46,759 $49,178 $62,565 $181,385
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The following table sets forth the dollar amount of the Corporation's fixed- and adjustable-rate loans with maturities greater than one year as of December 31, 2004:
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(Dollar amounts in thousands) Fixed Adjustable
rates rates
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Residential mortgage $ 89,887 $ 4,416
Commercial mortgage 13,867 29,856
Commercial business 12,268 1,739
Consumer 6,469 -
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$ 122,491 $ 36,011
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Contractual maturities of loans do not reflect the actual term of the Corporation's loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give the Corporation the right to declare a loan immediately payable in the event, among other things, that the borrower sells the real property subject to the mortgage. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates substantially exceed rates on existing mortgages and conversely, decrease when rates on existing mortgages substantially exceed current market interest rates.
Delinquencies and Classified Assets
Delinquent Loans and Real Estate Acquired Through Foreclosure (REO). Typically, a loan is considered past due and a late charge is assessed when the borrower has not made a payment within fifteen days from the payment due date. When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the deficiency by contacting the borrower. The initial contact with the borrower is made shortly after the seventeenth day following the due date for which a payment was not received. In most cases, delinquencies are cured promptly.
If the delinquency exceeds 60 days, the Corporation works with the borrower to set up a satisfactory repayment schedule. Typically loans are considered non-accruing upon reaching 90 days delinquency, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Corporation institutes foreclosure action on secured loans only if all other remedies have been exhausted. If an action to foreclose is instituted and the loan is not reinstated or paid in full, the property is sold at a judicial or trustee's sale at which the Corporation may be the buyer.
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The Corporation generally attempts to sell its REO properties as soon as practical upon receipt of clear title. The original lender typically handles disposition of those REO properties resulting from loans purchased in the secondary market.
As of December 31, 2004, the Corporation's non-performing assets, which include non-accrual loans, loans delinquent due to maturity, troubled debt restructuring, repossessions and REO, amounted to $911,000 or 0.33% of the Corporation's total assets.
Classified Assets. Regulations applicable to insured institutions require the classification of problem assets as "substandard," "doubtful," or "loss" depending upon the existence of certain characteristics as discussed below. A category designated "special mention" must also be maintained for assets currently not requiring the above classifications but having potential weakness or risk characteristics that could result in future problems. An asset is classified as substandard if not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted.
The Corporation's classification of assets policy requires the establishment of valuation allowances for loan losses in an amount deemed prudent by management. Valuation allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities. When the Corporation classifies a problem asset as a loss, the asset is charged-off immediately.
The Corporation regularly reviews the problem loans and other assets in its portfolio to determine whether any require classification in accordance with the Corporation's policy and applicable regulations. As of December 31, 2004, the Corporation's classified and criticized assets amounted to $6.6 million with $4.4 million classified as substandard and $2.2 million identified as special mention.
The following table sets forth information regarding the Corporation's non-performing assets as of December 31:
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(Dollar amounts in thousands) 2004 2003 2002 2001 2000
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Non-performing loans $ 840 $ 1,329 $ 1,160 $ 1,245 $ 900
Total as a percentage of gross loans 0.46% 0.69% 0.69% 0.78% 0.59%
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Repossessions 2 45 - - -
Real estate acquired through foreclosure 69 - 3 20 33
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Total as a percentage of total assets 0.03% 0.00% 0.00% 0.01% 0.02%
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Total non-performing assets $ 911 $ 1,374 $ 1,163 $ 1,265 $ 933
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Total non-performing assets
as a percentage of total assets 0.33% 0.52% 0.49% 0.58% 0.48%
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Allowance for loan losses as a
percentage of non-performing loans 215.48% 133.71% 136.81% 117.59% 162.22%
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Allowance for Loan Losses. Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend on non-performing assets; detailed analysis of individual loans for which full collectibility may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectibility of loans in the portfolio. The Corporation analyzes its loan portfolio each month for valuation purposes and to determine the adequacy of its allowance for losses. Based upon the factors discussed above, management believes that the Corporation's allowance for losses as of December 31, 2004 of $1.8 million is adequate to cover probable losses inherent in the portfolio.
The following table sets forth an analysis of the allowance for losses on loans receivable for the years ended December 31:
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(Dollar amounts in thousands) 2004 2003 2002 2001 2000
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Balance at beginning of period $1,777 $1,587 $1,464 $1,460 $1,373
Provision for loan losses 290 330 381 154 209
Charge-offs:
Mortgage loans (165) (25) (36) (27) (34)
Commercial business loans (36) (26) (186) (62) (1)
Consumer loans (117) (154) (109) (108) (121)
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(318) (205) (331) (197) (156)
Recoveries:
Mortgage loans 17 - 26 - -
Commercial business loans 19 22 20 - 2
Consumer loans 25 43 27 47 32
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61 65 73 47 34
Balance at end of period $1,810 $1,777 $1,587 $1,464 $1,460
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Ratio of net charge-offs to average loans outstanding 0.14% 0.08% 0.15% 0.10% 0.08%
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Ratio of allowance to total loans at end of period 1.00% 0.92% 0.93% 0.90% 0.96%
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The following table provides a breakdown of the allowance for loan losses by major loan category for the years ended December 31:
2004 2003 2002 2001 2000
Loan Categories: Amount % Amount % Amount % Amount % Amount %
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Commercial, financial and agricultural $ 503 27.8% $ 623 34.4% $ 479 26.5% $ 649 35.9% $ 286 15.8%
Commercial mortgages 1,137 62.8% 798 44.1% 625 34.5% 515 28.5% 399 22.0%
Residential mortgages 10 0.6% 20 1.1% 21 1.2% 23 1.3% 42 2.3%
Home Equity loans 39 2.2% 68 3.8% 63 3.5% 7 0.4% 6 0.3%
Consumer loans 121 6.7% 190 10.5% 119 6.6% 107 5.9% 182 10.1%
Unallocated - 0.0% 78 4.3% 280 15.5% 163 9.0% 545 30.1%
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$1,810 100% $1,777 98% $1,587 88% $1,464 81% $1,460 81%
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Investment Portfolio
General. The Corporation 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 and equity securities. Management generally maintains an investment portfolio with relatively short maturities to minimize overall interest rate risk. However, at December 31, 2004 approximately $14.7 million was invested in longer-term callable municipal securities, as part of strategy to moderate federal income taxes. The Bank has no investment with any one issuer in an amount greater than 10% of stockholders' equity.
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.
The following table sets forth certain information regarding the amortized cost, fair value, weighted average yields and contractual maturities of the Corporation's securities as of December 31, 2004:
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(Dollar amounts in thousands) Due in 1 Due from 1 Due from 3 Due from 5 Due after No scheduled
year or less to 3 years to 5 years to 10 years 10 years maturity Total
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U.S. Government securities $1,480 $ 9,367 $18,791 $5,032 $ - $ - $34,670
Mortgage-backed securities - - 572 3,292 16 - 3,880
Municipal securities - - - - 15,583 - 15,583
Corporate securities 3,782 2,290 - - - - 6,072
Equity securities - - - - - 3,157 3,157
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Estimated Fair Value $5,262 $11,657 $19,363 $8,324 $15,599 $3,157 $63,362
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Weighted average yield (1) 3.45% 3.15% 4.04% 4.10% 4.79% 3.10% 3.98%
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(1) Weighted average yield is calculated based upon amortized cost.
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For additional information regarding the Corporation's investment portfolio see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" 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 FHLB. In addition, the Bank can obtain advances from the FRB 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. Management reviews interest rates on deposits weekly and considers 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.
For additional information regarding the Corporation's deposit base and borrowed funds, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" in the Annual Report incorporated herein by reference.
Subsidiary Activity
The Corporation has one wholly owned subsidiary, the Bank, a national association. As of December 31, 2004, the Bank had no subsidiaries.
Personnel
At December 31, 2004, the Bank had 103 full time equivalent employees. There is no collective bargaining agreement between the Bank and its employees, and the Bank believes its relationship with its employees to be satisfactory.
Competition
The Bank competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers.
Risk Factors
The following discusses certain factors that may affect the Corporation's financial condition and results of operations and should be considered in evaluating the Corporation.
Ability of the Corporation to Execute Its Business Strategy. The financial performance and profitability of the Corporation will depend, in large part, on its ability to favorably execute its business strategy. This execution entails risks in, among other areas, technology implementation, market segmentation, brand identification, banking operations, and capital and human resource investments. Accordingly, there can be no assurance that the Corporation will be successful in its business strategy.
Economic Conditions and Geographic Concentration. The Corporation's operations are located in western Pennsylvania and are concentrated in Venango, Clarion and Butler Counties, Pennsylvania. Although management has diversified the Corporation's loan portfolio into other Pennsylvania counties, and to a very limited extent into other states, the vast majority of the Corporation's credits remain concentrated in the three primary counties. As a result of this geographic concentration, the Corporation's results depend largely upon economic and real estate market conditions in these areas. Deterioration in economic or real estate market conditions in the Corporation's primary market areas could have a material adverse impact on the quality of the Corporation's loan portfolio, the demand for its products and services, and its financial condition and results of operations.
Interest Rates. By nature, all financial institutions are impacted by changing interest rates, due to the impact of such upon:
o the demand for new loans
o prepayment speeds experienced on various asset classes, particularly
residential mortgage loans
o credit profiles of existing borrowers
o rates received on loans and securities
o rates paid on deposits and borrowings.
As presented previously, the Corporation is financially exposed to parallel shifts in general market interest rates, changes in the relative pricing of the term structure of general market interest rates, and relative credit spreads. Therefore, significant fluctuations in interest rates may present an adverse effect upon the Corporation's financial condition and results of operations.
Government Regulation And Monetary Policy. The financial services industry is subject to extensive federal and state supervision and regulation. Significant new laws, changes in existing laws, or repeals of present laws could cause the Corporation's financial results to materially differ from past results. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Corporation, and a material change in these conditions could present an adverse impact on the Corporation's financial condition and results of operations.
Competition. The financial services business in the Corporation's market areas is highly competitive, and is becoming more so due to technological advances (particularly Internet based financial services delivery), changes in the regulatory environment, and the enormous consolidation that has occurred among financial services providers. Many of the Corporation's competitors are much larger in terms of total assets and market capitalization, enjoy greater liquidity in their equity securities, have greater access to capital and funding, and offer a broader array of financial products and services. In light of this environment, there can be no assurance that the Corporation will be able to compete effectively. The results of the Corporation may materially differ in future periods depending upon the nature or level of competition.
Credit Quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans. The Corporation has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that management believes are appropriate to control this risk by assessing the likelihood of non-performance, tracking loan performance, and diversifying the credit portfolio. Such policies and procedures may not, however, prevent unexpected losses that could have a material adverse effect on the Corporation's financial condition or results of operations. Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond the Corporation's ability to predict, influence, or control.
Other Risks. From time to time, the Corporation details other risks with respect to its business and financial results in its filings with the SEC.
Supervision and Regulation
General. 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 that relate to the regulation of the Corporation 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.
The Corporation. The Corporation is a registered bank holding company, and subject to regulation and examination by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Corporation is required to file with the FRB periodic reports and such additional information as the FRB may require. Recent changes to the Bank Holding Company rating system emphasizes risk management and evaluation of the potential impact of non-depository entities on safety and soundness.
The FRB may require the Corporation to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments 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 the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities.
Further, the Corporation is required by the FRB to maintain certain levels of capital. See "Capital Standards."
The Corporation is required to obtain prior FRB approval 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 FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company.
The Corporation 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, subject to the prior FRB approval, The Corporation may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Under FRB regulations, the Corporation is required to serve as a source of financial and managerial strength to the Corporation's subsidiary bank and may not conduct operations in an unsafe or unsound manner. In addition, it is the FRB's policy that 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 FRB regulations or both.
The Corporation is also a bank holding company within the meaning of the Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the Pennsylvania Department of Banking.
The Corporation's securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Corporation is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act.
The Bank. As a national banking association, the Bank is subject to primary supervision, examination and regulation by the Office of the Comptroller of the Currency (the "OCC"). The Corporation is also subject to regulations of the Federal Deposit Insurance Corporation ("FDIC") as administrator of the Bank Insurance Fund ("BIF") and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Corporation's operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin "unsafe or unsound practices," to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank's growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank's deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Corporation's conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.
A national bank may have a financial subsidiary engaged in any activity authorized for national banks directly or certain permissible activities. Generally, a financial subsidiary is permitted to engage in activities that are "financial in nature" or incidental thereto, even though they are not permissible for the national bank itself. The definition of "financial in nature" includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance, issue annuities or engage in real estate development or investment or merchant banking.
The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses accounting oversight and corporate governance matters, including:
o the prohibition of accounting firms from providing various types of
consulting services to public clients and requiring accounting firms
to rotate partners among public client assignments every five years;
o increased penalties for financial crimes and forfeiture of executive
bonuses in certain circumstances;
o required executive certification of financial presentations;
o increased requirements for board audit committees and their members;
o enhanced disclosure of controls and procedures and internal control
over financial reporting;
o enhanced controls on, and reporting of, insider trading; and
o statutory separations between investment bankers and analysts.
The new legislation and its implementing regulations have resulted in increased costs of compliance, including certain outside professional costs. To date these costs have not had a material impact on the Corporation's operations.
USA PATRIOT Act of 2001. The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws. Under the USA PATRIOT Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships as well as enhanced due diligence and "know your customer" standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:
o To conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transaction,
o To ascertain the identity of the nominal and beneficial owners of, and
the source of funds deposited into, each account as needed to guard
against money laundering and report any suspicious transactions,
o To ascertain for any foreign bank, the shares of which are not
publicly traded, the identity of the owners of the foreign bank, and
the nature and extent of the ownership interest of each such owner,
and
o To ascertain whether any foreign bank provides correspondent accounts
to other foreign banks and, if so, the identity of those foreign banks
and related due diligence information.
Under the USA PATRIOT Act, financial institutions are required to establish and maintain anti-money laundering programs which included
o The establishment of a customer identification program,
o The development of internal policies, procedures, and controls,
o The designation of a compliance officer,
o An ongoing employee training program, and
o An independent audit function to test the programs.
The Bank has implemented comprehensive policies and procedures to address the requirements of the USA PATRIOT Act.
Privacy. Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide:
o initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
o annual notices of their privacy policies to current customers; and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Corporation's privacy policies have been implemented in accordance with the law.
Dividends and Other Transfers of Funds. Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. In addition, the Bank's regulators have 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.
Transactions with Affiliates. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of any affiliates. Such restrictions prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in any affiliate are limited, individually, to 10.0% of the Bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the Bank's capital and surplus. Some of the entities included in the definition of an affiliate are parent companies, sister banks, sponsored and advised companies, investment companies whereby the Bank or its affiliate serves as investment advisor, and financial subsidiaries of the bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms."
Loans-to-One Borrower Limitations. With certain limited exceptions, the maximum amount that a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2004, the Bank's loans-to-one-borrower limit was $3.0 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2004, the Bank's largest single lending relationship had an outstanding balance of $5.0 million, which consisted of a loan to a municipality and was not subject to the legal lending limit. The next largest aggregate borrower had loans which totaled $2.6 million and consisted of loans secured by commercial real estate and business property in the Bank's lending area, and was performing in accordance with its terms.
Capital Standards. The federal banking agencies have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as federal banking agencies, to 100% for assets with relatively high credit risk.
The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher
levels of capital being required for those categories perceived as representing
greater risk. Under the capital guidelines, a banking organization's total
capital is divided into tiers. "Tier I capital" consists of (1) common equity,
(2) qualifying noncumulative perpetual preferred stock, (3) a limited amount of
qualifying cumulative perpetual preferred stock and (4) minority interests in
the equity accounts of consolidated subsidiaries (including trust-preferred
securities), less goodwill and certain other intangible assets. Not more than
25% of qualifying Tier I capital may consist of trust-preferred securities.
"Tier II capital" consists of hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
preferred stock that does not qualify as Tier I capital, a limited amount of the
allowance for loan and lease losses and a limited amount of unrealized holding
gains on equity securities. "Tier III capital" consists of qualifying unsecured
subordinated debt. The sum of Tier II and Tier III capital may not exceed the
amount of Tier I capital.
The guidelines require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
In addition, federal banking regulators may set capital requirements higher than the minimums described above for financial institutions whose circumstances warrant it. For example, a financial institution experiencing or anticipating significant growth may be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2004, the Bank exceeded the required ratios for classification as "well/adequately capitalized."
An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized - without the express permission of the institution's primary regulator.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.
Premiums for Deposit Insurance. Through the BIF, the FDIC insures the Bank's customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution's capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required.
FDIC-insured depository institutions pay an assessment rate equal to the rate assessed on deposits insured by the Savings Association Insurance Fund ("SAIF").
The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Due to continued growth in deposits and some recent bank failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will be required to assess premiums on all banks. Any increase in assessments or the assessment rate could have a material adverse effect on the Corporation's earnings, depending on the amount of the increase. Furthermore, the FDIC is authorized to raise insurance premiums under certain circumstances.
The FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of deposit insurance for the Bank could have a material adverse effect on the Corporation's earnings, depending on the collective size of the particular institutions involved.
All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates for fourth quarter of fiscal 2004 were 1.46 cents for each $100 of assessable deposits. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC's insurance funds and do not vary depending on a depository institution's capitalization or supervisory evaluations.
Interstate Banking and Branching. Banks have the ability, subject to certain State restrictions, to acquire, by acquisition or merger, branches outside its home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.
Consumer Protection Laws and Regulations. The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.
The Community Reinvestment Act, or CRA, is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank's record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of "outstanding" to a low of "substantial noncompliance." In its last examination for CRA compliance, as of March 22, 1999, the Bank was rated "satisfactory."
On February 22, 2005, the federal banking agencies re-proposed amendments to the CRA regulations that would:
o increase the definition of "small institution" from total assets of $250 million to $1 billion, without regard to any holding company; and
o take into account abusive lending practices by a bank or its affiliates in determining a bank's CRA rating.
There can be no assurances such proposal will be adopted or, if adopted, in what form.
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, or FACT, requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with FACT, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer's election to opt out would be applicable for at least five years.
The Check Clearing for the 21st Century Act, or Check 21, facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a "substitute check," which is the legal equivalent of an original check. Check 21, effective October 28, 2004, does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original.
The Equal Credit Opportunity Act, or ECOA, generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act, or TILA, is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act, or FH Act, regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act, or HMDA, grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a "fair lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
The term "predatory lending," much like the terms "safety and soundness" and "unfair and deceptive practices," is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. But typically predatory lending involves at least one, and perhaps all three, of the following elements:
o making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation ("asset-based lending")
o inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ("loan flipping")
o engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.
FRB regulations aimed at curbing such lending significantly widen the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.
Effective April 8, 2005, OCC guidelines require national banks and their operating subsidiaries to comply with certain standards when making or purchasing loans to avoid predatory or abusive residential mortgage lending practices. Failure to comply with the guidelines could be deemed an unsafe and unsound or unfair or deceptive practice, subjecting the bank to supervisory enforcement actions.
Finally, the Real Estate Settlement Procedures Act, or RESPA, requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Pittsburgh. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2004, the Bank was in compliance with the stock requirements.
Federal Reserve System. The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At December 31, 2004, the Bank was in compliance with these requirements.
Item 2. Properties
The Corporation owns no real property but utilizes the main office of the Bank. The Corporation's and the Bank's executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility. The following table sets forth information with respect to the Bank's offices at December 31, 2004:
---------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Owned Lease Net Book Deposits
or Expiration Value or at
Location County Leased Date (1) Annual Rent 12/31/2004
---------------------------------------------------------------------------------------------------------------------
Corporate and Bank Main Offices:
--------------------------------
Headquarters and Main Office Venango Owned -- $1,827 $48,528
612 Main Street, Emlenton, Pennsylvania 16373
Data Center Venango Owned -- 929 --
708 Main Street, Emlenton, Pennsylvania 16373
Bank Branch Offices
-------------------
Bon Aire Office Butler Leased May 2011 36 34,952
1101 North Main Street, Butler, Pennsylvania 16003
Brookville Office Jefferson Owned -- 219 22,995
263 Main Street, Brookville, Pennsylvania 15825
Clarion Wood Street Office Clarion Owned -- 343 35,753
Sixth & Wood Street, Clarion, Pennsylvania 16214
DuBois Office Clearfield Leased June 2005 20 13,662
861 Beaver Drive, Dubois, Pennsylvania 15801
East Brady Office Clarion Owned -- 50 17,098
323 Kelly's Way, East Brady, Pennsylvania 16028
Eau Claire Office Butler Owned -- 147 14,876
207 Washington Street, Eau Claire, Pennsylvania 16030
Knox Office Clarion Leased December 2011 26 28,346
Route 338 South, Knox, Pennsylvania 16232
Meridian Office Butler Leased December 2012 26 5,919
101 Meridian Road, Butler, Pennsylvania 16003
Ridgway Office Elk Owned -- 143 10,745
173 Main Street, Ridgway, Pennsylvania 15853
------------
$232,874
============
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(1) Lease agreements for leased offices typically include renewal options.
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The Bank also maintains remote ATM facilities within its market area.
Item 3. Legal Proceedings
Neither the Bank nor the Corporation is involved in any material legal proceedings. The Bank, from time to time, is party to litigation that 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 Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to stockholders for a vote during the quarter ended December 31, 2004.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
(a) The information is contained under the section captioned "Common Stock Information" in the Corporation's Annual Report for the fiscal year ended December 31, 2004, and is incorporated herein by reference. For information with respect to equity compensation plans, see "Item 11 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." There were no sales of the Corporation's unregistered securities during the period covered by this report.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities. The Corporation did not repurchase any of its equity securities in the year ended December 31, 2004.
Item 6: Selected Financial Data
The required information is contained in the section captioned "Selected Consolidated Financial Data" in the Corporation's Annual Report for the year ended December 31, 2004 and incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The required information is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation's Annual Report for the year ended December 31, 2004 and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk for the Corporation is comprised primarily from interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and paying liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates.
Interest rate sensitivity is the result of differences in the amounts and repricing dates of the bank's rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing "gap", provide an indication of the extent that the Corporation's net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.
At December 31, 2004, the Corporation's interest-earning assets maturing or repricing within one year totaled $81.9 million while the Corporation's interest-bearing liabilities maturing or repricing within one-year totaled $124.1 million, providing an excess of interest-bearing liabilities over interest-earning assets of $42.2 million or a negative 15.5% of total assets. At December 31, 2004, the percentage of the Corporation's assets to liabilities maturing or repricing within one year was 66.0%.
For more information, see "Market Risk Management" in Exhibit 13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004.
Item 8. Financial Statements and Supplementary Data
The Corporation's consolidated financial statements required herein are contained in the Corporation's Annual Report for the year ended December 31, 2004and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
On January 19, 2005, Emclaire Financial Corp.'s (the Corporation) Board of Directors dismissed its independent auditors, Crowe Chizek and Company LLC (Crowe Chizek) with Beard Miller Company LLP (Beard Miller) to be effective upon filing of the 2004 Form 10-K. Crowe Chizek will complete its engagement as independent auditor for the Corporation's fiscal year ended December 31, 2004 upon the filing of the Corporation's Form 10-K for the year ended December 31, 2004. Crowe Chizek's report on the Corporation's consolidated financial statements during the two most recent fiscal years preceding the date hereof contained no adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Corporation's Audit Committee. During the last two fiscal years and the subsequent interim period to the date hereof, there were no disagreements between the Corporation and Crowe Chizek on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or principles, which disagreement(s), if not resolved to the satisfaction of Crowe Chizek, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its reports. None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Corporation within the last two fiscal years and the subsequent interim period to the date hereof.
Effective January 19, 2005, the Corporation engaged Beard Miller as its independent auditors for the fiscal year ending December 31, 2005. During the last two fiscal years and the subsequent interim period to the date hereof, the Corporation did not consult Beard Miller regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
Item 9A. Controls and Procedures.
The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation's reports in compliance with the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to the Corporation's Management, including its Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-14(c) promulgated under the Exchange Act. As of December 31, 2004, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Management, including the Corporation's Chief Executive Officer and the Corporation's Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on the foregoing, the Corporation's Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Corporation's disclosure controls and procedures were effective.
During the fourth quarter of fiscal year 2004, there were no significant changes in the Corporation's internal control over financial reporting or in other factors that could significantly affect the internal controls subsequent to the date of the evaluation referenced above.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
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" is incorporated by reference to the Corporation's definitive proxy statement for the Corporation's Annual Meeting of Stockholders to be held on May 18, 2005 (the Proxy Statement) which will be filed no later than 120 days following the Corporation's fiscal year end.
The Corporation maintains a Code of Personal and Business Conduct and Ethics (the "Code") that applies to all employees, including the CEO and the principal financial and accounting officer. A copy of the Code is included as Exhibit 14 hereto. Any waiver of the Code with respect to the CEO and the principal financial and accounting officer will be publicly disclosed in accordance with applicable regulations.
Item 11. Executive Compensation
The information contained under the section captioned "Information as to Nominees, Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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.
Item 13. Certain Relationships and Related Transactions
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.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned "Ratification of Independent Public Accountants" in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Schedules
(a)(1)-(2) Financial Statements and Schedules:
(i) Financial statements and schedules included in Exhibit 13 to this Form
10-K are filed as part of this report.
(ii) All other financial statement schedules are omitted because the
required information is not applicable, or because the information
required is included in the consolidated financial statements and
notes thereto.
(3) Management Contracts or Compensatory Plans:
(i) Exhibits 10.1-10.3 listed below in (b) below identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference.
(b) Exhibits are either attached as part of this Report or incorporated herein by reference.
3.1 Articles of Incorporation of Emclaire Financial Corp. (1)
3.2 Bylaws of Emclaire Financial Corp. (1)
4 Specimen Stock Certificate of Emclaire Financial Corp. (2)
10.1 Form of Change in Control Agreement between Registrant and two executive officers. (3)
10.2 Form of Group Term Carve-Out Plan between the Farmers National Bank of Emlenton and 20 Officers and Employees.
10.3 Form of Supplemental Executive Retirement Plan Agreement between the Farmers National Bank of Emlenton and Six Officers. (5)
11 Statement regarding computation of earnings per share (see Note 1 of the Notes to Consolidated Financial Statements in the Annual Report).
13 Annual Report to Stockholders for the fiscal year ended December 31, 2004.
14 Code of Personal and Business Conduct and Ethics.
16 Letter regarding change in certifying accountant
20 Emclaire Financial Corp. Dividend Reinvestment and Stock Purchase Plan.(4)
21 Subsidiaries of the Registrant (see information contained herein under "Item 1. Description of Business - Subsidiary Activity").
31.1 CEO 302 Certification.
31.2 Principal Financial and Accounting Officer 302 Certification.
32.1 Chief Executive Officer 906 Certification.
32.2 Principal Financial and Accounting Officer 906 Certification.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, as amended, (File No. 333-11773) declared effective by the SEC
on October 25, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2002.
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 29, 2005 By: /s/ David L. Cox
--------------------------------------
David L. Cox
President, Chief Executive Officer,
and Director
(Duly Authorized Representative)
|
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/ Shelly L. Rhoades
----------------------------------------------- ------------------------------------------------
David L. Cox Shelly L. Rhoades
President, Chief Executive Officer, and Director Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 29, 2005 Date: March 29, 2005
By: /s/ Ronald L. Ashbaugh By: /s/ Brian C. McCarrier
----------------------------------------------- ------------------------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 29, 2005 Date: March 29, 2005
By: /s/ James M. Crooks By: /s/ George W. Freeman
----------------------------------------------- ------------------------------------------------
James M. Crooks George W. Freeman
Director Director
Date: March 29, 2005 Date: March 29, 2005
By: /s/ Mark A. Freemer By: /s/ Robert L. Hunter
----------------------------------------------- ------------------------------------------------
Mark A. Freemer Robert L. Hunter
Director Director
Date: March 29, 2005 Date: March 29, 2005
By: /s/ J. Michael King By: /s/ John B. Mason
----------------------------------------------- ------------------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 29, 2005 Date: March 29, 2005
|
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended December 31, 2004
Consolidated Financial Highlights
---------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
As of or for the year ended December 31,
---------------------------------------------------------------------------------------------------------
2004 2003 Change
--------- --------- ------
Balance Sheet:
Total assets $273,380 $262,512 4%
Loans receivable, net 179,575 190,482 (6%)
Total deposits 232,874 217,110 7%
Stockholders' equity 23,616 22,655 4%
Stockholders' equity per share 18.63 17.87 4%
Income Statement:
Net income $ 2,557 $ 2,492 3%
Net interest income 8,734 9,308 (6%)
Basic earnings per share 2.02 1.91 5%
Cash dividends per share 0.94 1.11 (15%)
Key Ratios:
Return on average assets 0.96% 0.99% (3%)
Return on average stockholders' equity 11.08% 10.96% 1%
Efficiency ratio 67.11% 64.16% (5%)
---------------------------------------------------------------------------------------------------------
|
Selected Consolidated Financial Data
------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
---------------------------------------------------------------
As of December 31,
Financial Condition Data 2004 2003 2002 2001 2000
------------------------ ---------------------------------------------------------------
Total assets $ 273,380 $ 262,512 $ 238,577 $ 216,717 $ 194,165
Securities 63,362 49,162 48,748 38,755 26,688
Loans receivable, net 179,575 190,482 169,557 160,540 150,332
Deposits 232,874 217,110 204,425 189,470 171,125
Borrowed funds 15,000 20,700 10,000 5,000 2,000
Stockholders' equity 23,616 22,655 22,680 21,111 20,045
Stockholders' equity per common share $ 18.63 $ 17.87 $ 17.02 $ 15.84 $ 15.04
Tangible stockholders' equity per common share $ 17.48 $ 16.70 $ 15.82 $ 14.54 $ 13.53
------------------------ ---------------------------------------------------------------
For the year ended December 31,
Operations Data 2004 2003 2002 2001 2000(1)
---------------- ---------------------------------------------------------------
Interest income $ 13,953 $ 14,209 $ 14,653 $ 14,589 $ 14,402
Interest expense 5,219 4,901 5,161 6,097 5,832
----------- ----------- ----------- ----------- -----------
Net interest income 8,734 9,308 9,492 8,492 8,570
Provision for loan losses 290 330 381 154 209
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 8,444 8,978 9,111 8,338 8,361
Noninterest income 2,535 1,785 1,400 1,339 1,187
Noninterest expense 7,909 7,522 7,420 7,254 8,977
----------- ----------- ----------- ----------- -----------
Income before income taxes 3,070 3,241 3,091 2,423 571
Provision for income taxes 513 749 834 718 567
----------- ----------- ----------- ----------- -----------
Net income $ 2,557 $ 2,492 $ 2,257 $ 1,705 $ 4
=========== =========== =========== =========== ===========
Average common shares outstanding 1,267,835 1,301,714 1,332,835 1,332,835 1,348,210
Basic earnings per share $ 2.02 $ 1.91 $ 1.69 $ 1.28 $ 0.00
Dividends per share (3) $ 0.94 $ 1.11 $ 1.03 $ 0.70 $ 0.62
---------------------------------------------------------------
As of or for the year ended December 31,
Other Data 2004 2003 2002 2001 2000(1)
---------- ---------------------------------------------------------------
Performance Ratios
Return on average assets 0.96% 0.99% 0.99% 0.84% -
Return on average equity 11.08% 10.96% 10.21% 8.35% 0.02%
Yield on interest-earning assets (2) 5.81% 6.28% 6.93% 7.69% 8.04%
Cost of interest-bearing liabilities 2.57% 2.56% 2.99% 3.99% 4.06%
Cost of funds 2.15% 2.16% 2.53% 3.35% 3.38%
Interest rate spread (2) 3.24% 3.72% 3.94% 3.70% 3.98%
Net interest margin (2) 3.71% 4.18% 4.54% 4.52% 4.83%
Efficiency ratio (2) (4) 67.11% 64.16% 64.98% 69.58% 86.99%
Noninterest expense to average assets 2.96% 2.99% 3.25% 3.56% 4.62%
Interest-earning assets to average assets 92.86% 92.69% 94.65% 94.42% 93.39%
Loans to deposits 77.11% 87.74% 82.94% 84.73% 87.85%
Dividend payout ratio (3) 46.61% 57.98% 60.95% 54.72% -
Asset Quality Ratios
Non-performing loans to total loans 0.46% 0.69% 0.68% 0.78% 0.59%
Non-performing assets to total assets 0.33% 0.52% 0.49% 0.58% 0.48%
Allowance for loan losses to total loans 1.00% 0.92% 0.93% 0.90% 0.96%
Allowance for loan losses to non-performing loans 215.48% 133.71% 136.81% 117.59% 162.22%
Capital Ratios
Stockholders' equity to assets 8.64% 8.63% 9.51% 9.74% 10.32%
Tangible stockholders' equity to tangible assets 8.15% 8.11% 8.90% 9.01% 9.38%
Average equity to average assets 8.63% 9.02% 9.69% 10.02% 10.71%
------------------------------------------------------------------------------------------------------------------------
|
(1) Exclusive of $2.0 million ($1.8 million net of applicable income tax
benefits) in charges for the write-down of an intangible asset assessed as
impaired of $1.6 million and a decline in the value of a marketable
security determined to be other than temporary of $448,000, net income,
noninterest expense, return on average assets, return on average equity,
noninterest expense to average assets, and efficiency ratio would have been
$1.8 million, $6.5 million, 0.94%, 8.77%, 3.36% and 65.32%, respectively,
for the year ended December 31, 2000.
(2) Interest income utilized in calculation is on a fully tax equivalent basis.
(3) Includes $.25 per share special cash dividends paid in December 2003 and
December 2002.
(4) The efficiency ratio is calculated by dividing operating expenses (less
intangible amortization) by net income (TE basis) and noninterest income.
The efficiency ratio gives us a measure of how effectively a bank is
operating.
I am pleased to report that the year ended December 31, 2004 was another successful year for Emclaire Financial Corp. and Farmers National Bank of Emlenton. Growth in the Corporation's assets and earnings continued to be strong and we remain confident that an expanding economy will strengthen our ability to further enhance profitability. I am excited about the future of Emclaire Financial Corp. and pleased to be associated with such a wonderful organization. The following information discusses the major activities and events that affected the condition and earnings as of December 31, 2004 and for the year ended December 31, 2004, respectively.
Emclaire Financial Corp. (the Corporation) is a Pennsylvania corporation and bank holding company that provides a full range of retail and commercial financial products and services to customers in western Pennsylvania through its wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the Bank).
The Bank was organized in 1900 as a national banking association and is a financial intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens on residential and commercial property, consumer loans, commercial business loans, marketable securities and interest-earning deposits. The Bank operates through a network of 10 offices in Venango, Butler, Clarion, Clearfield, Elk and Jefferson counties, Pennsylvania. The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.
The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank's chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation, as a registered bank holding company, is subject to regulation by the Federal Reserve Board.
Discussions of certain matters in this Annual Report and other related year end
documents may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such,
may involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Corporation operates, projections of future performance and potential future
credit experience. The Corporation's actual results, performance and
achievements may differ materially from the results, performance and
achievements expressed or implied in such forward-looking statements due to a
wide range of factors. These factors include, but are not limited to, changes in
interest rates, general economic conditions, the local economy, accounting
principles or guidelines, legislative and regulatory changes, government
monetary and fiscal policies, real estate markets, financial services industry
competition, attracting and retaining key personnel, regulatory actions and
other risks detailed in the Corporation's reports filed with the Securities and
Exchange Commission (SEC) from time to time. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements. The Corporation does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
Total assets increased $10.9 million or 4.1% to $273.4 million at December 31, 2004 from $262.5 million at December 31, 2003. This increase was primarily due to increases in securities of $14.2 million and cash equivalents of $6.9 million. Offsetting the net increase in assets was a decrease in loans receivable of $10.5 million.
The increase in the Corporation's total assets was primarily funded by increases in total liabilities of $9.9 million or 4.1% to $249.8 million at December 31, 2004 from $239.9 million at December 31, 2003. The increase in total liabilities was primarily due to an increase in customer deposits of $15.8 million or 7.3%. Offsetting the increase in total liabilities was a decrease in borrowed funds of $5.7 million or 27.5%.
Cash and cash equivalents. Cash on hand and interest-earning deposits increased a combined $6.9 million or 89.9% to $14.6 million at December 31, 2004 from $7.7 million at December 31, 2003. These accounts are typically increased by net operating results, deposits by customers into savings and checking accounts, loan repayments, the maturities of securities and proceeds from borrowed funds. Decreases result from customer deposit withdrawals, loan originations, security purchases, repayments of borrowed funds and cash dividends to stockholders.
Securities. Securities increased $14.2 million or 28.9% to $63.4 million at December 31, 2004 from $49.2 million at December 31, 2003 as a result of excess liquidity. This excess liquidity resulted in security purchases totaling $29.0 million, comprised of purchases of short-term commercial paper, mortgage-backed securities, U.S. Government agency and related entities and marketable equity securities of $2.5 million, $3.0 million, $22.4 million and $1.1 million, respectively, during 2004. Partially offsetting the net increase in securities were security maturities, calls and sales totaling $13.4 million, comprised of commercial paper, corporate, U.S. Government agency and related entities and marketable equity securities of $2.5 million, $3.5 million, $6.5 million and $953,000, respectively, during 2004. Also contributing to the change in securities for the year was a decrease in the unrealized gain on available for sale securities.
Loans receivable. Net loans receivable decreased $10.5 million or 5.5% to $180.0 million at December 31, 2004 from $190.5 million at December 31, 2003. This decrease can be attributed to decreases in the Corporation's residential mortgage loans, commercial business loans and consumer loans of $7.1 million, $2.6 million and $5.7 million, respectively. Contributing to the decrease in consumer loans was the sale of our student loan portfolio of $3.9 million. Offsetting these decreases in the loan portfolio were increases in commercial real estate loans of $3.6 million or 8.0% and home equity loans of $1.2 million or 4.1%. The increase in commercial real estate loans was a result of the growth in the commercial real estate market, the lower interest rate environment and the continued focus by management on commercial lending. The increase in home equity loans was due primarily to loan campaigns put forth during the year and also the shift from residential first mortgage loans to home equity loans and lines of credit.
Non-performing assets. Non-performing assets include non-accrual loans, real estate acquired through foreclosure (REO) and repossessions. Non-performing assets decreased $463,000 or 33.7% to $911,000 or 0.33% of total assets at December 31, 2004 from $1.4 million or 0.52% of total assets at December 31, 2003. Non-performing assets consisted of non-performing loans, REO and repossessions of $840,000, $69,000, and $2,000, respectively, at December 31, 2004 and $1.3 million, $0 and $45,000, respectively, at December 31, 2003.
Federal bank stocks. Federal bank stocks were comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock of $1.398 million and $333,000, respectively, at December 31, 2004. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships between the Corporation and the banks.
Bank-owned life insurance (BOLI). BOLI is comprised of single premium life insurance policies of $4.0 million on 20 officers and employees of the Bank. During 2004, the BOLI increased $176,000 or 4.1% to $4.4 million at December 31, 2004 from $4.3 million at December 31, 2003. This net increase was comprised of the appreciation of the cash surrender value of $192,000 offset by executive life insurance expense of $16,000.
Premises and equipment. Premises and equipment increased $143,000 or 2.7% to $5.4 million at December 31, 2004 from $5.2 million at December 31, 2003. The net increase resulted from capital expenditures of $682,000, offset by normal depreciation of fixed assets of $539,000. Contributing to the increase in capital expenditures was the final completion of the renovations to our headquarters in Emlenton and also the purchase of a new mainframe for our data processing operations.
Goodwill, core deposit and customer relationship intangibles. Core deposit intangibles decreased $33,000 or 61.1% to $21,000 at December 31, 2004 from $54,000 at December 31, 2003 as a result of normal amortization during the year. Also during 2004 the Corporation purchased our financial service representative's customer list and recognized a $20,000 customer relationship intangible asset. During the year this intangible asset decreased $3,000 or 16.7% to $17,000 as a result of normal amortization.
Deposits. Total deposits increased $15.8 million or 7.3% to $232.9 million at December 31, 2004 from $217.1 million at December 31, 2003. The increase in customer deposits can be attributed to internal growth within the Bank's branch network across all major deposit categories. For the year, noninterest-bearing demand, interest-bearing demand and time deposits increased $4.2 million or 11.5%, $2.5 million or 3.2% and $9.1 million or 8.9%, respectively. Also contributing to the increase in customer deposits was the introduction of a new Certificate of Deposit product which steps up to a higher rate at each year anniversary date over the next four years, the marketing efforts put forth during the year throughout our branch network and the transfer of two large sweep accounts into other demand deposit accounts. This increase in deposits can also be attributed to a shift of customer funds from mutual funds and other equity investments to FDIC-insured bank deposit products. This shift has happened industry-wide during recent years as a result from the national economic downturn and overall weaker stock market performance experienced.
Borrowed funds. Borrowed funds, or advances from the FHLB, decreased $5.7 million or 27.5% to $15.0 million at December 31, 2004 from $20.7 million at December 31, 2003. The decrease in advances was the result of the repayment of FHLB overnight borrowings of $5.7 million using excess funds.
Accrued interest payable. Accrued interest payable increased $100,000 or 21.0% to $577,000 at December 31, 2004 from $477,000 at December 31, 2003 as a result of the increase in interest-bearing deposits.
Accrued expenses and other liabilities. Accrued expenses and other liabilities decreased $257,000 or 16.4% to $1.3 million at December 31, 2004 from $1.6 million at December 31, 2003 primarily as a result of decreased accruals for income taxes, incentive bonus and other pension expenses to be paid in early 2005.
Total stockholders' equity increased $961,000 or 4.2% to $23.6 million at December 31, 2004 from $22.7 million at December 31, 2003. Contributing to this increase was net income of $2.6 million offset by dividends declared of $1.2 million and a decrease in accumulated other comprehensive income of $404,000. Returns on average equity and assets were 11.08% and 0.96%, respectively for 2004.
The Corporation has maintained a strong capital position with an equity to assets ratio of 8.6% for both years ended December 31, 2004 and 2003. While continuing to sustain this strong capital position, stockholders received dividends of $1.2 million in 2004. Exclusive of a special cash dividend in the fourth quarter 2003 of $317,000, regular quarterly dividends increased $71,000 or 6.3% to $1.19 million in 2004 from $1.12 million in 2003. Stockholders have taken part in the Corporation's dividend reinvestment plan introduced during 2002 with 38% of registered shareholder accounts active in the plan at December 31, 2004 and 2003.
Capital adequacy is the Corporation's ability to support growth while protecting the interest of shareholders and depositors and to ensure that capital ratios are in compliance with regulatory minimum requirements. Regulatory agencies have developed certain capital ratio requirements that are used to assist them in monitoring the safety and soundness of financial institutions. At December 31, 2004, the Corporation and the Bank were in compliance with all regulatory capital requirements.
The Corporation's primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, and amortization and prepayments of outstanding loans and maturing securities. During 2004, the Corporation used its sources of funds primarily to fund loan commitments and purchase securities. As of December 31, 2004, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $14.9 million. The Bank is required by the OCC to establish policies to monitor and manage liquidity levels to ensure the Bank's ability to meet demands for customer withdrawals and the repayment of short-term borrowings. The Bank is currently in compliance with all liquidity policy limits.
At December 31, 2004, time deposits amounted to $111.4 million or 47.8% of the Corporation's total consolidated deposits, including approximately $44.3 million, which are scheduled to mature within the next year. Management of the Corporation believes that they have adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation has alternative sources of funds such as a term borrowing capacity from the FHLB and, to a limited extent, through the sale of loans. At December 31, 2004, the Corporation's borrowing capacity with the FHLB, net of funds borrowed, was $109.7 million.
Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses as a critical accounting policy.
The allowance for loan losses provides for an estimate of probable losses in the loan portfolio. In determining the appropriate level of the allowance for loan loss, the loan portfolio is separated into risk-rated and homogeneous pools. Migration analysis/historical loss rates, adjusted for relevant trends, have been applied to these pools. Qualitative adjustments are then applied to the portfolio to allow for quality of lending policies and procedures, national and local economic and business conditions, changes in the nature and volume of the portfolio, experience, ability and depth of lending management, changes in the trends, volumes and severity of past due, non-accrual and classified loans and loss and recovery trends, quality of the Corporation's loan review system, concentrations of credit, and external factors. The methodology used to determine the adequacy of the Corporation's reserves for loan losses is comprehensive and meets regulatory and accounting industry standards for assessing the allowance, however it is still an estimate. Loan losses are charged against the allowance while recoveries of amounts previously charged-off are credited to the allowance. Loan loss provisions are charged against current earnings based on management's periodic evaluation and review of the factors indicated above.
The Corporation reported net income of $2.6 million, $2.5 million and $2.3 million in 2004, 2003 and 2002, respectively. The following "Average Balance Sheet and Yield/Rate Analysis" and "Analysis of Changes in Net Interest Income" tables should be utilized in conjunction with the discussion of net interest income.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis.
-------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
2004 2003 2002
------------------------- -------------------------- ---------------------------
Average Yield / Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans receivable $186,374 $11,892 6.38% $178,030 $12,130 6.81% $167,062 $12,441 7.45%
--------- -------- ----- --------- -------- ----- --------- -------- -----
Securities, taxable 40,245 1,396 3.47% 35,635 1,391 3.90% 29,745 1,485 4.99%
Securities, tax exempt 15,398 1,014 6.58% 16,070 1,066 6.63% 12,970 902 6.95%
--------- -------- ----- --------- -------- ----- --------- -------- -----
55,643 2,410 4.33% 51,705 2,457 4.75% 42,715 2,387 5.59%
--------- -------- ----- --------- -------- ----- --------- -------- -----
Interest-earning cash equivalents 4,405 71 1.61% 1,996 25 1.25% 4,719 73 1.55%
Federal bank stocks 1,753 42 2.40% 1,749 48 2.74% 1,314 55 4.19%
--------- -------- ----- --------- -------- ----- --------- -------- -----
6,158 113 1.84% 3,745 73 1.95% 6,033 128 2.12%
--------- -------- ----- --------- -------- ----- --------- -------- -----
Total interest-earning assets 248,175 14,415 5.81% 233,480 14,660 6.28% 215,810 14,956 6.93%
Cash and due from banks 7,175 6,066 5,467
Other noninterest-earning assets 11,913 12,355 6,741
--------- --------- ---------
Total Assets $267,263 $251,901 $228,018
========= ========= =========
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $ 77,421 $ 457 0.59% $ 77,058 $ 596 0.77% $ 71,983 $ 799 1.11%
Time deposits 110,456 4,129 3.74% 99,562 3,775 3.79% 94,301 4,094 4.34%
--------- -------- ----- --------- -------- ----- --------- -------- -----
187,877 4,586 2.44% 176,620 4,371 2.47% 166,284 4,893 2.94%
--------- -------- ----- --------- -------- ----- --------- -------- -----
Borrowed funds 15,504 633 4.08% 14,724 530 3.60% 6,203 268 4.32%
--------- -------- ----- --------- -------- ----- --------- -------- -----
Total interest-bearing liabilities 203,381 5,219 2.57% 191,344 4,901 2.56% 172,487 5,161 2.99%
Noninterest-bearing demand deposits 38,800 - - 35,970 - - 31,679 - -
--------- -------- ----- --------- -------- ----- --------- -------- -----
Funding and cost of funds 242,181 5,219 2.15% 227,314 4,901 2.16% 204,166 5,161 2.53%
Other noninterest-bearing
liabilities 2,005 1,856 1,748
--------- --------- ---------
Total Liabilities 244,186 229,170 205,914
Stockholders' Equity 23,077 22,731 22,104
--------- --------- ---------
Total Liabilities and Equity $267,263 $251,901 $228,018
========= -------- ========= -------- ========= --------
Net interest income $ 9,196 $ 9,759 $ 9,795
======== ======== ========
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 3.24% 3.72% 3.94%
===== ===== =====
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.71% 4.18% 4.54%
===== ===== =====
|
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation's interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior year volume), changes in volume (changes in volume multiplied by prior year rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.
-----------------------------------------------------------------------------------------------------------------------
2004 versus 2003 2003 versus 2002
Increase (decrease) Increase (decrease)
due to due to
------------------------ -------------------------
(Dollar amounts in thousands) Volume Rate Total Volume Rate Total
------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $553 $ (791) $(238) $ 787 $(1,098) $(311)
Securities 179 (226) (47) 458 (388) 70
Interest-earning cash equivalents 37 9 46 (36) (12) (48)
Federal bank stocks - (6) (6) 15 (22) (7)
----- -------- ------ ------- -------- ------
Total interest-earning assets 769 (1,014) (245) 1,224 (1,520) (296)
----- -------- ------ ------- -------- ------
Interest expense:
Deposits 275 (60) 215 291 (813) (522)
Borrowed funds 29 74 103 313 (51) 262
----- -------- ------ ------- -------- ------
Total interest-bearing liabilities 304 14 318 604 (864) (260)
----- -------- ------ ------- -------- ------
Net interest income $465 $(1,028) $(563) $ 620 $ (656) $ (36)
===== ======== ====== ======= ======== ======
|
2004 Results Compared to 2003 Results
The Corporation reported net income of $2.6 million and $2.5 million for 2004 and 2003, respectively. The $65,000 or 2.6% increase in net income can be attributed to increases in noninterest income of $750,000 and decreases in the provision for loan losses and the provision for income taxes of $40,000 and $236,000, respectively, offset by a decrease in net interest income of $574,000 and an increase in noninterest expense of $387,000.
Net interest income. The primary source of the Corporation's revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest-bearing liabilities and changes in the level of interest rates. Tax equivalent net interest income decreased $564,000 or 5.8% to $9.2 million for 2004, compared to $9.8 million for 2003. This decrease in net interest income can be attributed to a decrease in tax equivalent interest income of $245,000 and a increase in interest expense of $319,000.
Interest income. Tax equivalent interest income decreased $245,000 or 1.7% to $14.4 million for 2004, compared to $14.7 million for 2003. This decrease can be attributed to decreases in interest earned on loans, securities and federal bank stocks of $238,000, $47,000 and $6,000, respectively, offset by an increase in interest earned on interest-earning cash equivalents of $46,000.
Tax equivalent interest earned on loans receivable decreased $238,000 or 2.0% to $11.9 million for 2004, compared to $12.1 million for 2003. During that time, average loans increased $8.3 million or 4.7%, accounting for $553,000 in additional loan interest income. Due to the continually lower interest rate environment experienced in both 2004 and 2003, this volume increase was more than offset by a decrease of $791,000 relating to the 43 basis point reduction in the average interest rate earned on the loan portfolio.
Tax equivalent interest earned on securities decreased $47,000 or 1.9% to $2.4 million for 2004, compared to $2.5 million for 2003. The average volume of these assets increased $3.9 million or 7.6% - as a result of the deployment of funds from deposit growth, in excess of loan demand, into short-term commercial paper, U.S. Government agency and related entities, mortgage-backed and equity securities - accounting for $179,000 of the increase in interest income. The average rate of securities decreased 42 basis points during 2004 resulting in an offsetting reduction in such interest income of $226,000.
Interest earned on interest-earning deposit accounts, including federal funds sold, increased $40,000 or 54.8% to $113,000 for 2004, compared to $73,000 for 2003. The average volume of these assets increased $2.4 million or 64.4% as a result of excess funds resulting from lower loan production and growth in deposits, accounting for $37,000 of the increase in interest income. The average rate of interest-earning deposits decreased 11 basis points during 2004 resulting in a decrease in interest income of $3,000. Interest rates earned on interest-earning deposit accounts are influenced by the Federal Reserve Board (FRB) and generally fluctuate with changes in the discount rate. During 2004, the FRB raised the discount rate 125 basis points to 3.25% at December 31, 2004 from 2.00% at December 31, 2003.
Interest expense. Interest expense increased $319,000 or 6.5% to $5.2 million for 2004, compared to $4.9 million for 2003. This increase in interest expense can be attributed to increases in interest incurred on deposits and borrowed funds of $216,000 and $103,000, respectively.
Deposit interest expense increased $216,000 or 4.9% to $4.6 million for 2004, compared to $4.4 million for 2003. This increase in interest expense can be attributed to the increase in average interest-bearing deposits of $11.3 million or 6.4% between 2004 and 2003 resulting in additional interest expense of $275,000. Offsetting the volume variance was a 3 basis point decline in the cost of interest-bearing deposits to 2.44% for 2004 versus 2.47% for 2003 resulting in a reduction in expense due to rate of $59,000.
Interest expense on borrowed funds increased $103,000 or 19.4% to $633,000 for 2004, compared to $530,000 for 2003. This increase was a result of the increase in the average balance of borrowed funds of $780,000 or 5.3% to $15.5 million in 2004 from $14.7 million in 2003 resulting in additional interest expense of $29,000. In addition to the volume increase, the average rate on borrowed funds increased 48 basis points to 4.08% for 2004 versus 3.60% for 2003 resulting in an increase in interest expense due to rate of $74,000. The increase in the average balance and rate of borrowed funds was primarily a result of the Federal Home Loan Bank term borrowing in June 2003. Offsetting the increase was interest capitalization on the renovations of the main headquarters in Emlenton, Pennsylvania.
Provision for loan losses. The Corporation records provisions for loan losses to bring the total allowance for loan losses to a level deemed adequate to cover probable losses incurred in the loan portfolio. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the present and prospective financial condition of borrowers, current and prospective economic conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectibility of the loan portfolio.
The provision for loan losses decreased $40,000 or 12.1% to $290,000 for 2004, compared to $330,000 for 2003. The Corporation's allowance for loan losses amounted to $1.8 million or 1.00% of the Corporation's total loan portfolio at December 31, 2004, compared to $1.8 million or 0.92% at December 31, 2003. The allowance for loan losses as a percentage of non-performing loans at December 31, 2004 and 2003 was 215.48% and 133.71%, respectively. The decrease in the provision for loan losses from 2004 to 2003 was primarily due to the decreases in loans receivable and nonperforming loans of $10.5 million and $489,000, respectively.
Noninterest income. Noninterest income includes items that are not related to interest rates, but rather to services rendered and activities conducted in the financial services industry, such as fees on depository accounts, general transaction and service fees, security and loan gains and losses and earnings on BOLI. Noninterest income increased $750,000 or 42.0% to $2.5 million for 2004, compared to $1.8 million for 2003. This can be attributed to increases in fees and service charges, commissions on financial services, gains on securities and other noninterest income $88,000, $95,000, $531,000 and $87,000, respectively. Offsetting this increase were decreases in gains on the sale of loans and earnings on BOLI of $10,000 and $41,000, respectively.
The earnings on fees and service charges increased $88,000 or 8.5% to $1.1 million for 2004, compared to $1.0 million for 2003. This increase was primarily the result of Management electing to increase our non-sufficient funds fee early in 2004.
During the year the Corporation entered into an agreement with Blue Vase Securities, LLC to provide investment advisory services to our customers, and operates as Farmers Financial Services. Blue Vase Securities, LLC is a nation-wide, full-service, independent broker/dealer that offers various services such as investments, insurances, wealth management, advisory services, estate and retirement planning and account consolidation. This partnership has enabled the Corporation to provide our customers with financial solutions that extend outside the Bank's ordinary deposit products and services. The Corporation earns commissions from providing this service and recognized $95,000 in 2004.
In 2004, Management elected to sell its student loan portfolio based on the low interest rate environment and the higher expense associated with the servicing of these loans. This sale resulted in a gain on the sale of loans of $39,000 in 2004. Offsetting this gain was an adjustment of $2,000 associated with loans sold in 2003. The remainder of this portfolio has been classified as loans held for sale.
In 2003, Management began to diversify its security portfolio with an emphasis on marketable equity securities of community banks with growth potential, increasing dividend yields and the potential to diversify the Corporation's business. In 2004, Management began to realize gains on the diversification of the security portfolio. The first investment contributed $296,000 to the gain on the sale of securities as Management elected to divest this investment into other community bank stocks and other funding needs. The second investment, which was an involuntary transaction that resulted from the sale of the community bank, contributed $365,000 to gains on securities.
The earnings on BOLI decreased $41,000 or 17.6% to $192,000 for 2004, compared to $233,000 for 2003. Lower interest rates earned on our bank-owned life insurance contributed to this decrease in earnings between 2004 and 2003.
Other noninterest income increased $87,000 or 28.9% to $388,000 for 2004, compared to $301,000 for 2003. Other noninterest income consists primarily of miscellaneous customer fees for ATM and debit card privileges, wire transfer fees, commissions on insurance and gains on the sale of foreclosed assets.
Noninterest expense. Noninterest expense increased $387,000 or 5.1% to $7.9 million for 2004, compared to $7.5 million for 2003. This increase in noninterest expense is comprised of increases in compensation and employee benefits, premises and equipment expenses and other noninterest expenses of $219,000, $172,000 and $75,000, respectively, offset by the reduction in intangible amortization expense of $79,000.
The largest component of noninterest expense is compensation and employee benefits. This expense increased $219,000 or 5.2%. Normal annual salary and wage adjustments, increased health insurance costs, higher director's fees, and commissions paid to our financial services representative were the major components of this increase. Also contributing to the increase was the addition of our new compliance officer and credit analyst. Partially offsetting this increase was a reduction in pension costs, employee training expenses, incentive accruals and a decrease in standard loan costs deferred associated with personnel as a result of lower loan production.
Premises and equipment expense increased $172,000 or 16.4% primarily as a result of additional depreciation on certain data processing equipment placed in service in the first quarter 2004 and the depreciation related to the renovations incurred at the headquarter office in Emlenton during 2003.
Intangible amortization expense decreased $79,000 or 68.7% as a result of the cessation of intangible amortization expense on three branches previously acquired which have been fully amortized. Offsetting this decrease was the increase in intangible amortization expense of $3,000 related to the customer relationship intangible asset recognized in 2004 (see discussion above on the intangible asset section of the balance sheet). The customer relationship intangible asset will be amortized over two years.
Other expense increased $75,000 or 3.4% primarily as a result of increased telephone costs, Pennsylvania shares and use taxes and software amortization. Other noninterest expenses consists primarily of loan servicing costs, credit bureau and loan expenses, contributions, bad checks and other losses and other miscellaneous operating expenses. Partially offsetting this increase in other expenses were decreases in professional fees, postage and freight, advertising and other noninterest expenses.
Provision for income taxes decreased $236,000 or 31.5% to $513,000 for 2004, compared to $749,000 for 2003. Contributing to this change was the effective tax rate decreasing to 16.7% for 2004 from 23.2% for 2003 as a direct result of investments in tax-free municipal securities and loans, nontaxable BOLI income and a historical tax credit related to the renovations of the main office building.
2003 Results Compared to 2002 Results
The Corporation reported net income of $2.5 million and $2.3 million for 2003 and 2002, respectively. The $235,000 or 10.4% increase in net income can be attributed to increases in noninterest income of $385,000 and decreases in the provision for loan losses and the provision for income taxes of $51,000 and $85,000, respectively, offset by a decrease in net interest income of $184,000 and an increase in noninterest expense of $102,000.
Net interest income. The primary source of the Corporation's revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest-bearing liabilities and changes in the level of interest rates. Tax equivalent net interest income decreased $36,000 to $9.75 million for 2003, compared to $9.79 million for 2002. This decrease in net interest income can be attributed to a decrease in tax equivalent interest income of $296,000 and a decrease in interest expense of $260,000.
Interest income. Tax equivalent interest income decreased $296,000 or 2.0% to $14.7 million for 2003, compared to $15.0 million for 2002. This decrease can be attributed to decreases in interest earned on loans, interest-earning cash equivalents and federal bank stocks of $311,000, $48,000 and $7,000, respectively, offset by an increase in securities of $70,000.
Tax equivalent interest earned on loans receivable decreased $311,000 or 2.5% to $12.1 million for 2003, compared to $12.4 million for 2002. During that time, average loans increased $11.0 million or 6.6%, accounting for $787,000 in additional loan interest income. Due to the continually lower interest rate environment in 2003 versus 2002, this volume increase was more than offset by a decrease of $1.1 million relating to the 64 basis point reduction in the average interest rate earned on the loan portfolio.
Aside from changes in the volume and rates of loans receivable discussed above, $93,000 of the decrease in loan net interest income between the years can be attributed to the payoff of a previously non-performing commercial real estate loan in March 2002 that had been on non-accrual status. In connection with the loan payoff, the Corporation received all principal and interest due under the contractual terms of the loan agreement; and therefore, interest collected was recorded as loan interest income during 2002.
Tax equivalent interest earned on securities increased $70,000 or 2.9% to $2.5 million for 2003, compared to $2.4 million for 2002. The average volume of these assets increased $9.0 million or 21.0% - as a result of the deployment of funds from deposit growth, in excess of loan demand, into short-term commercial paper, corporate, U.S. Government agency and related entities and equity securities - accounting for $458,000 of the increase in interest income. The average rate of securities decreased 84 basis points during 2003 resulting in an offsetting reduction in such interest income of $388,000.
Interest earned on interest-earning deposit accounts, including federal funds sold, decreased $48,000 or 65.8% to $25,000 for 2003, compared to $73,000 for 2002, as a result of lower average balances maintained and a decline in the yield on these funds. Interest earned on federal bank stocks declined primarily as a result of lower yields on these instruments in 2003 versus 2002.
Interest expense. Interest expense decreased $260,000 or 5.0% to $4.9 million for 2003, compared to $5.2 million for 2002. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits of $522,000, offset by an increase in interest incurred on borrowed funds of $262,000.
Deposit interest expense decreased $522,000 or 10.7% to $4.4 million for 2003, compared to $4.9 million for 2002. This decrease in interest expense can be attributed to a 47 basis point decline in the cost of interest-bearing deposits to 2.47% for 2003 versus 2.94% for 2002 resulting in a reduction in expense due to rate of $813,000. The favorable rate variance was partially offset by an increase in average interest-bearing deposits of $10.3 million or 6.2% between 2003 and 2002 resulting in additional interest expense of $291,000.
Interest expense on borrowed funds increased $262,000 or 97.8% to $530,000 for 2003, compared to $268,000 for 2002 due to a $5.0 million FHLB term borrowing placed in June 2003 and the increase in the average balance of overnight borrowings of $1.7 million to $1.8 million for 2003 compared to $161,000 in 2002. Offsetting the increase was interest capitalization on the renovations of the main headquarters in Emlenton, Pennsylvania.
Provision for loan losses. The Corporation records provisions for loan losses to bring the total allowance for loan losses to a level deemed adequate to cover probable losses inherent in the loan portfolio. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the present and prospective financial condition of borrowers, current and prospective economic conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectibility of the loan portfolio.
The provision for loan losses decreased $51,000 or 13.4% to $330,000 for 2003, compared to $381,000 for 2002. The Corporation's allowance for loan losses amounted to $1.8 million or 0.92% of the Corporation's total loan portfolio at December 31, 2003, compared to $1.6 million or 0.93% at December 31, 2002. The allowance for loan losses as a percentage of non-performing loans at December 31, 2003 and 2002 was 133.71% and 136.81%, respectively. The decrease in the provision for loan losses from 2002 to 2003 was primarily due to decreased charge-offs in 2003 while impaired and other nonperforming loans remained relatively stable.
Noninterest income. Noninterest income includes items that are not related to interest rates, but rather to services rendered and activities conducted in the financial services industry, such as fees on depository accounts, general transaction and service fees, security and loan gains and losses, and earnings on BOLI. Noninterest income increased $385,000 or 27.5% to $1.8 million for 2003, compared to $1.4 million for 2002. This can be attributed to increases in fees and service charges, gains on the sale of loans and marketable securities and earnings on BOLI of $65,000, $8,000, $170,000 and $175,000, respectively. Offsetting this increase was a decrease in other noninterest income of $33,000.
In 2003, Management began to diversify its security portfolio with an emphasis on marketable equity securities into community banks with growth potential, increasing dividend yields and the potential to diversify the Corporation's business. Reducing risk and increasing the return on equity and asset ratios were also contributing factors. The unrealized gain on the equity portfolio is attributable largely to one equity security holding which management has held during several years of appreciation in price. As these securities are classified as available for sale, they may be sold in the future. Gains on the sale of these available for sale marketable equity securities are anticipated to be recognized over the next two years. The increase in the gains on the sale of marketable equity securities of $170,000 in 2003 was a direct result of this diversification.
The earnings on BOLI increased $175,000 to $233,000 for 2003, compared to $58,000 for 2002. The difference consists of an entire year of earnings recognized in 2003 versus only three months in 2002.
Other noninterest income decreased $33,000 or 9.9% to $301,000 for 2003, compared to $334,000 for 2002. Other noninterest income consists primarily of miscellaneous customer fees for ATM and debit card privileges, wire transfer fees, commissions on insurance and gains on the sale of foreclosed assets.
Noninterest expense. Noninterest expense increased $102,000 or 1.4% to $7.5 million for 2003, compared to $7.4 million for 2002. This increase in noninterest expense is comprised of increases in compensation and employee benefits and other noninterest expenses of $155,000 and $64,000, respectively, offset by the reduction in intangible amortization expense and premises and equipment expense of $31,000 and $86,000, respectively.
The largest component of noninterest expense is compensation and employee benefits. This expense increased $155,000 or 3.9%. Normal annual salary and wage adjustments, increased pension costs and a higher accrual for incentive compensation, which is based on return on average asset and equity ratios, were the major components of this increase. Partially offsetting this increase was a reduction in headcount through normal attrition between 2003 and 2002, a decrease in employee benefits expense as a result of the decrease in staffing levels and an increase in standard loan costs deferred associated with personnel.
Premises and equipment expense decreased $86,000 or 7.6% primarily as a result of the cessation of depreciation on certain data processing equipment in the fourth quarter 2002. In 2004, depreciation will increase as a result of the final renovations of the main office and the purchases of new data processing equipment that will be placed in service throughout the year.
Intangible amortization expense decreased $31,000 or 21.2% as a result of the cessation of intangible amortization expense on three branches previously acquired which have been fully amortized.
Other expense increased $64,000 or 3.0% primarily as a result of increased printing and office supplies, postage, marketing and other noninterest expenses. Other noninterest expenses consists primarily of loan servicing costs, credit bureau and loan expenses, contributions, bad checks and other losses, and other miscellaneous operating expenses. Contributing to the increase in these expenses was the addition of a new branch early in 2003 and increased loan volume throughout the year. Partially offsetting this increase in other expenses were decreases in software amortization expense as certain amortization periods expired in late 2002 and in 2003, telephone and data communications, professional fees and Pennsylvania shares tax expenses.
Provision for income taxes decreased $85,000 or 10.2% to $749,000 for 2003, compared to $834,000 for 2002. Contributing to this change was the effective tax rate decreasing to 23.2% for 2003 from 27.0% for 2002 as a direct result of an increase in nontaxable interest income on tax-free investments and loans, nontaxable BOLI income and a historical tax credit related to the renovations of the main office building.
The primary objective of the Corporation's asset liability management function is to maximize the Corporation's net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Corporation's operating environment, capital and liquidity requirements, performance objectives and overall business focus. One of the primary measures of the exposure of the Corporation's earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of interest-bearing liabilities.
The Bank's Board of Directors has established a Finance Committee, consisting of four outside directors, the President and Chief Executive Officer and the Principal Financial and Accounting Officer, to monitor market risk, including primarily interest rate risk. This committee, which meets at least quarterly, generally establishes and monitors the investment, interest rate risk and asset and liability management policies established by the Corporation.
Interest Rate Sensitivity Gap Analysis.
The implementation of asset and liability initiatives and strategies and compliance with related policies, combined with other external factors, such as demand for the Corporation's products and economic and interest rate environments in general, has resulted in the Corporation maintaining a one-year cumulative interest rate sensitivity gap ranging between a positive and negative 20% of total assets. The one-year interest rate sensitivity gap is identified as the difference between the Corporation's interest-earning assets that are scheduled to mature or reprice within one year and its interest-bearing liabilities that are scheduled to mature or reprice within one year.
The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities, and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero, or more neutral, that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.
At December 31, 2004, the Corporation's interest-earning assets maturing or repricing within one year totaled $81.9 million while the Corporation's interest-bearing liabilities maturing or repricing within one-year totaled $124.1 million, providing an excess of interest-bearing liabilities over interest-earning assets of $42.2 million or a negative 15.5% of total assets. At December 31, 2004, the percentage of the Corporation's assets to liabilities maturing or repricing within one year was 65.9%.
The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2004 which are expected to mature, prepay or reprice in each of the future time periods presented:
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Due within Due within Due within Due in
Due in six months one to three to over
(Dollar amounts in thousands) six months to one three five five Total
or less year years years years
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Total interest-earning assets $ 55,610 $ 26,246 $72,404 $52,342 $46,277 $252,879
Total interest-bearing liabilities 104,270 19,850 35,826 19,183 27,086 206,215
--------- --------- -------- -------- -------- ---------
Maturity or repricing gap during the period $(48,660) $ 6,396 $36,578 $33,159 $19,191 $ 46,664
========= ========= ======== ======== ======== =========
Cumulative gap $(48,660) $(42,264) $(5,686) $27,473 $46,664
========= ========= ======== ======== ========
Ratio of gap during the period to total assets (17.80%) 2.34% 13.38% 12.13% 7.02%
========= ========= ======== ======== ========
Ratio of cumulative gap to total assets (17.80%) (15.46%) (2.08%) 10.05% 17.07%
========= ========= ======== ======== ========
Total assets $273,380
========
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Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.
The one-year interest rate sensitivity gap has been the most common industry standard used to measure an institution's interest rate risk position regarding maturities, repricing and prepayments. In recent years, in addition to utilizing interest rate sensitivity gap analysis, the Corporation has increased its emphasis on the utilization of interest rate sensitivity simulation analysis to evaluate and manage interest rate risk.
Interest Rate Sensitivity Simulation Analysis.
The Corporation also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Finance Committee of the Bank believes that simulation modeling enables the Corporation to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different loan and security prepayment and deposit decay assumptions under various interest rate scenarios.
As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Corporation's historical experience and industry standards and are applied consistently across the different rate risk measures.
The Corporation has established the following guidelines for assessing interest rate risk:
Net interest income simulation. Given a 200 basis point parallel and gradual increase or decrease in market interest rates, net interest income may not change by more than 25% for a one-year period.
Portfolio equity simulation. Portfolio equity is the net present value of the Corporation's existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 30% of stockholders' equity.
These guidelines take into consideration the current interest rate environment, the Corporation's financial asset and financial liability product mix and characteristics and liquidity sources among other factors.
The following table presents the simulated impact of a 100 basis point or 200 basis point upward or a 100 basis point or 200 basis point downward shift of market interest rates on net interest income for the years ended December 31, 2004 and 2003, respectively. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2004 remained constant. The impact of the market rate movements on net interest income was developed by simulating the effects of rates changing gradually during a one-year period from the December 31, 2004 levels for net interest income.
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Increase Decrease
--------------- ------------------
+100 +200 -100 -200
BP BP BP BP
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2004 Net interest income - increase (decrease) 0.46% (1.12%) (4.95%) (11.75%)
2003 Net interest income - increase (decrease) 1.32% 0.59% (4.49%) (9.37%)
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The consolidated financial statements of the Corporation and related notes presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Corporation's assets and liabilities are critical to the maintenance of acceptable performance levels.
Statement of Financial Accounting Standards (SFAS) No. 153 modifies an exception from fair value measurement of nonmonetary exchanges. Exchanges that are not expected to result in significant changes in cash flows of the reporting entity are not measured at fair value. This supersedes the prior exemption from fair value measurement for exchanges of similar productive assets and applies for fiscal years beginning after June 15, 2005.
Statement of Position 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made.
The effect of these new standards on the Corporation's financial position and results of operations is not expected to be material upon and after adoption.
Consolidated Balance Sheets
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(Dollar amounts in thousands, except share data)
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December 31,
--------------------
2004 2003
--------- ---------
Assets
Cash and due from banks $ 7,769 $ 6,776
Interest-earning deposits in banks 6,855 927
--------- ---------
Cash and cash equivalents 14,624 7,703
Securities available for sale 63,346 49,145
Securities held to maturity; fair value of $16 and $17 16 17
Loans held for sale 386 -
Loans receivable, net of allowance for loan losses of $1,810 and $1,777 179,575 190,482
Federal bank stocks 1,731 1,982
Bank-owned life insurance 4,448 4,272
Accrued interest receivable 1,203 1,270
Premises and equipment, net 5,366 5,223
Goodwill 1,422 1,422
Other intangibles 38 54
Prepaid expenses and other assets 1,225 942
--------- ---------
Total assets $273,380 $262,512
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest bearing $ 40,511 $ 36,332
Interest-bearing 192,363 180,778
--------- ---------
Total deposits 232,874 217,110
Borrowed funds 15,000 20,700
Accrued interest payable 577 477
Accrued expenses and other liabilities 1,313 1,570
--------- ---------
Total liabilities 249,764 239,857
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Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares authorized;
none issued - -
Common stock, $1.25 par value, 12,000,000 shares authorized;
1,395,852 shares issued, 1,267,835 outstanding 1,745 1,745
Additional paid-in capital 10,871 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 12,398 11,033
Accumulated other comprehensive income 1,255 1,659
--------- ---------
Total Stockholders' Equity 23,616 22,655
--------- ---------
Total Liabilities and Stockholders' Equity $273,380 $262,512
========= =========
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
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(Dollar amounts in thousands, except share data)
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Year ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Interest and dividend income:
Loans receivable, including fees $ 11,744 $ 12,009 $ 12,419
Securities:
Taxable 1,396 1,391 1,485
Exempt from federal income tax 700 736 621
Federal bank stocks 42 48 55
Deposits with banks and federal funds sold 71 25 73
----------- ----------- -----------
Total interest and dividend income 13,953 14,209 14,653
----------- ----------- -----------
Interest expense:
Deposits 4,586 4,371 4,893
Borrowed funds 633 530 268
----------- ----------- -----------
Total interest expense 5,219 4,901 5,161
----------- ----------- -----------
Net interest income 8,734 9,308 9,492
Provision for loan losses 290 330 381
----------- ----------- -----------
Net interest income after provision for loan losses 8,444 8,978 9,111
----------- ----------- -----------
Noninterest income:
Fees and service charges 1,122 1,034 969
Commissions on financial services 95 - -
Gain on the sale of loans 37 47 39
Gains on securities 701 170 -
Earnings on bank-owned life insurance 192 233 58
Other 388 301 334
----------- ----------- -----------
Total noninterest income 2,535 1,785 1,400
----------- ----------- -----------
Noninterest expense:
Compensation and employee benefits 4,395 4,176 4,021
Premises and equipment, net 1,222 1,050 1,136
Intangible amortization expense 36 115 146
Other 2,256 2,181 2,117
----------- ----------- -----------
Total noninterest expense 7,909 7,522 7,420
----------- ----------- -----------
Income before provision for income taxes 3,070 3,241 3,091
Provision for income taxes 513 749 834
----------- ----------- -----------
Net income $ 2,557 $ 2,492 $ 2,257
=========== =========== ===========
Basic earnings per share $ 2.02 $ 1.91 $ 1.69
Average common shares outstanding 1,267,835 1,301,714 1,332,835
See accompanying notes to consolidated financial statements.
|
Consolidated Statements of Changes in Stockholders' Equity
---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
Accumulated
Additional Other Total
Common Paid-in Treasury Retained Comprehensive Stockholders'
Stock Capital Stock Earnings Income Equity
-------- ---------- -------- -------- ------------ -------------
Balance at January 1, 2002 $1,745 $10,871 $ (971) $ 9,094 $ 372 $21,111
Comprehensive income:
Net income 2,257 2,257
Change in net unrealized gain on
securities available for sale, net of
taxes of $353 685 685
-------
Comprehensive income 2,942
Dividends declared, $1.03 per share (1,373) (1,373)
-------- ---------- -------- -------- ------------ -------------
Balance at December 31, 2002 1,745 10,871 (971) 9,978 1,057 22,680
Comprehensive income:
Net income 2,492 2,492
Change in net unrealized gain on
securities available for sale, net of
taxes of $310 602 602
-------
Comprehensive income 3,094
Purchase of treasury stock, 65,000 Shares (1,682) (1,682)
Dividends declared, $1.11 per share (1,437) (1,437)
-------- ---------- -------- -------- ------------ -------------
Balance at December 31, 2003 1,745 10,871 (2,653) 11,033 1,659 22,655
Comprehensive income:
Net income 2,557 2,557
Change in net unrealized gain on
securities available for sale, net of
taxes of ($207) (404) (404)
-------
Comprehensive income 2,153
Dividends declared, $0.94 per share (1,192) (1,192)
-------- ---------- -------- -------- ------------ -------------
Balance at December 31, 2004 $1,745 $10,871 $(2,653) $12,398 $1,255 $23,616
======== ========== ======== ======== ============ =============
See accompanying notes to consolidated financial statements.
|
Consolidated Statements of Cash Flows
---------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
Year ended December 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Operating activities:
Net income $ 2,557 $ 2,492 $ 2,257
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization for premises and equipment 539 404 460
Provision for loan losses 290 330 381
Amortization of premiums and accretion of discounts, net 223 253 236
Amortization of intangible assets 36 115 146
Gains on Securities (701) (170) -
Gain on sale of loans (37) (47) (39)
Loans originated for sale - (1,989) (1,245)
Proceeds from sales of loans held for sale 3,541 2,036 1,284
Earnings on bank-owned life insurance, net (176) (218) (54)
Changes in:
Accrued interest receivable 67 55 (74)
Prepaid expenses and other assets (6) (642) (338)
Accrued interest payable 100 10 (13)
Accrued expenses and other liabilities (257) 565 349
--------- --------- ---------
Net cash provided by operating activities 6,176 3,194 3,350
--------- --------- ---------
Investing activities:
Loan originations and payments, net 6,628 (21,344) (9,531)
Available-for-sale securities:
Sales 945 647 -
Maturities, prepayments and calls 13,299 36,369 33,475
Purchases (28,549) (36,524) (42,561)
Held-to-maturity securities:
Maturities, prepayments and calls 1 12 31
(Purchases) Sale of federal bank stocks 251 (684) (37)
Purchase of bank-owned life insurance - - (4,000)
Purchase of intangible asset - customer relationship (20) - -
Purchases of premises and equipment (682) (1,949) (750)
--------- --------- ---------
Net cash used in investing activities (8,127) (23,473) (23,373)
--------- --------- ---------
Financing activities:
Net increase in deposits 15,764 12,685 14,955
Borrowings from the FHLB - 10,700 5,000
Repayments of borrowed funds (5,700) - -
Dividends paid (1,192) (1,437) (1,373)
Payments to acquire treasury stock - (1,682) -
--------- --------- ---------
Net cash provided by financing activities 8,872 20,266 18,582
--------- --------- ---------
Net increase (decrease) in cash equivalents 6,921 (13) (1,441)
Cash equivalents at beginning of period 7,703 7,716 9,157
--------- --------- ---------
Cash equivalents at end of period $ 14,624 $ 7,703 $ 7,716
========= ========= =========
Supplemental cash flow information:
Interest paid $ 5,119 $ 4,891 $ 5,174
Income taxes paid 295 828 725
Supplemental noncash disclosures:
Transfers from portfolio loans to loans held for sale $ 3,890 $ - $ -
Transfers from loans to repossessed assets 69 - 3
See accompanying notes to consolidated financial statements.
|
1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation.
Emclaire Financial Corp. (the "Corporation") is a Pennsylvania company organized as the holding company of Farmers National Bank of Emlenton (the "Bank"). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania. Its primary deposit products are checking, savings and certificate of deposit accounts and its primary lending products are residential and commercial mortgage, commercial business and consumer loans.
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
Use of Estimates.
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, loan servicing rights, fair value of financial instruments and deferred tax assets.
Cash and Cash Equivalents.
Cash and cash equivalents include cash on hand and in banks, interest-earning deposits with other financial institutions and federal funds sold. Interest-earning deposits mature within one year and are carried at cost. Net cash flows are reported for loan and deposit transactions.
Restrictions on Cash. Cash on hand or on deposit with the Federal Reserve Bank of approximately $3.0 million and $2.5 million was required to meet regulatory reserve and clearing requirements at December 31, 2004 and 2003, respectively. Such balances do not earn interest.
Securities.
Securities are classified as either available for sale or held to maturity at the time of purchase based on management's intent and ability. Securities acquired with the positive intent and ability 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. Available for sale securities consist of securities that are not classified as held to maturity and are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity, net of tax, until realized. Realized gains and losses are computed using the specific identification method and are included in operations in the period sold. Interest and dividends on investment securities are recognized as income when earned. Securities are written down to fair value when a decline in fair value is not temporary.
1. Summary of Significant Accounting Policies (continued)
Loans Held for Sale.
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale are generally sold with servicing rights retained. The carrying value of loans sold is reduced by the cost allocated to the servicing rights. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans Receivable.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans or premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, and premiums and discounts are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on loans is typically discontinued at the time the loan is 90 days or more delinquent unless the credit is well secured and in the process of collection. Loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance established for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
1. Summary of Significant Accounting Policies (continued)
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower. Large groups of homogeneous loans are evaluated collectively for impairment. Accordingly, the Corporation does not identify individual consumer and residential mortgage loans for impairment disclosures.
Bank-Owned Life Insurance (BOLI).
The Corporation has purchased life insurance policies on certain key officers and employees. BOLI is recorded at its cash surrender value, or the amount that can be realized.
Premises and Equipment.
Land is carried at cost. Premises, furniture and equipment, and leasehold improvements are carried at cost less accumulated depreciation or amortization. Depreciation is calculated on a straight-line basis for the estimated useful lives of the related assets, which are 39 to 40 years for buildings and three to 10 years for furniture and equipment. Amortization of leasehold improvements is computed using the straight-line method for the term of the related lease. Premises and equipment are reviewed for impairment when events indicate their carry amount may not be recoverable from future undiscounted cash flows. If impaired, assets are recorded at fair value.
Goodwill and Intangible Assets.
Goodwill results from business acquisitions and represents the excess of the purchase price above the fair value of acquired assets and liabilities. Core deposit intangible assets arise from whole bank or branch acquisitions and are measured at fair value and then are amortized on a straight-line basis for their estimated lives, generally less than 10 years. Customer relationship intangible assets arise from the purchase of a customer list from another company or individual and then are amortized on a straight-line basis over 2 years. Goodwill is not amortized and is assessed at least annually for impairment and any such impairment will be recognized in the period identified.
Servicing Assets.
Servicing assets represent the allocated value of retained servicing rights on loans sold. Servicing assets are expensed in proportion to, and for the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the capitalized amount for a grouping.
1. Summary of Significant Accounting Policies (continued)
Real Estate Acquired Through Foreclosure.
Real estate properties acquired through foreclosure (REO) are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation is recorded through expense. Costs after acquisition are expensed. Real estate acquired through foreclosure is classified in prepaid expenses and other assets and totaled $69,000 and $0 at December 31, 2004 and 2003, respectively.
Income Taxes.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Basic Earnings per Common Share.
The Corporation maintains a simple capital structure with no common stock equivalents. Basic earnings per common share is calculated using net income divided by the weighted average number of common shares outstanding during the period. The Corporation's capital structure contains no potentially dilutive securities.
Comprehensive Income.
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Operating Segments.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial services operations are considered by management to be aggregated in one reportable operating segment, banking.
Retirement Plans.
The Corporation maintains a noncontributory defined benefit plan covering substantially all employees and officers. The plan calls for benefits to be paid to eligible employees at retirement based primarily on years of service and compensation rates near retirement. The Corporation also maintains a 401(k) plan which covers substantially all employees and a supplemental executive retirement plan for key executive officers.
1. Summary of Significant Accounting Policies (continued)
Effect of Newly Issued But Not Yet Effective Accounting Standards.
In 2005, the Corporation will adopt FASB Statement No. 153, Fair Value of Nonmonetary Exchanges and FASB Statement of Position 03-3, Loans Acquired in a Transfer. Adoption of these new standards is not expected to materially affect the Corporation's operating results or financial condition.
Transfers of Financial Assets.
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Off-Balance Sheet Financial Instruments.
In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments, consisting of commitments to extend credit, commitments under line of credit lending arrangements and letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are received.
Fair Value of Financial Instruments.
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Loss Contingencies.
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are now such matters that will have a material effect on the financial statements.
Reclassifications.
Certain items in the prior year financial statements were reclassified to conform to the current presentation.
2. Securities
The following table summarizes the Corporation's securities as of December 31:
----------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost gains losses value
----------------------------------------------------------------------------------------------------
Available for sale:
-------------------
December 31, 2004:
U.S. Government agencies and related entities $34,869 $ 61 $(260) $34,670
Mortgage-backed securities 3,911 - (47) 3,864
Municipal securities 14,682 901 - 15,583
Corporate securities 6,012 69 (9) 6,072
Equity securities 1,970 1,200 (13) 3,157
-------- ------- ------ --------
$61,444 $2,231 $(329) $63,346
======== ======= ====== ========
December 31, 2003:
U.S. Government agencies and related entities $19,061 $ 83 $(249) $18,895
Mortgage-backed securities 1,691 - (22) 1,669
Municipal securities 14,680 811 - 15,491
Corporate securities 9,599 273 (1) 9,871
Equity securities 1,601 1,622 (4) 3,219
-------- ------- ------ --------
$46,632 $2,789 $(276) $49,145
======== ======= ====== ========
Held to maturity:
-----------------
December 31, 2004:
Mortgage-backed securities $ 16 $ - $ - $ 16
-------- ------- ------ --------
$ 16 $ - $ - $ 16
======== ======= ====== ========
December 31, 2003:
Mortgage-backed securities $ 17 $ - $ - $ 17
-------- ------- ------ --------
$ 17 $ - $ - $ 17
======== ======= ====== ========
|
Sales of available for sale securities were as follows:
---------------------------------------------------------------------- (Dollar amounts in thousands) 2004 2003 2002 ---------------------------------------------------------------------- Proceeds $ 945 $ 647 $ - Gross gains 701 170 - Tax provision related to gains 238 58 - ---------------------------------------------------------------------- |
The following table summarizes scheduled maturities of the Corporation's securities as of December 31, 2004:
-----------------------------------------------------------------------------
Available for sale Held to maturity
------------------- -----------------
Amortized Fair Amortized Fair
(Dollar amounts in thousands) cost value cost value
-----------------------------------------------------------------------------
Due in one year or less $ 5,263 $ 5,262 $ - $ -
Due from one year to five years 31,177 31,020 - -
Due from five to ten years 8,351 8,324 - -
Due after ten years 14,683 15,583 16 16
No scheduled maturity 1,970 3,157 - -
-------- -------- ---- ----
$61,444 $63,346 $16 $16
======== ======== ==== ====
|
2. Securities (continued)
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities with carrying values of $9.7 million and $8.6 million as of December 31, 2004 and 2003, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
At year end 2004 and 2003, there were no holdings of securities of any one issuer, other than U.S. Government agency and related entities, in an amount greater than 10% of shareholders' equity.
Securities with unrealized losses at year end 2004 and 2003 not recognized in income are as follows:
------------------------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
--------------------- --------------------- ---------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
(Dollar amounts in thousands) Value Loss Value Loss Value Loss
------------------------------------------------------------------------------------------------------------------------
December 31, 2004:
U.S. Government agencies and related entities $10,968 $ (48) $ 9,288 $(212) $20,256 $(260)
Mortgage-backed securities 3,292 (41) 573 (6) 3,865 (47)
Municipal securities - - - - - -
Corporate securities 1,512 (9) - - 1,512 (9)
Equity securities 39 (1) 268 (12) 307 (13)
-------- ------ -------- ------ -------- ------
$15,811 $ (99) $10,129 $(230) $25,940 $(329)
======== ====== ======== ====== ======== ======
December 31, 2003:
U.S. Government agencies and related entities $11,316 $(249) $ - $ - $11,316 $(249)
Mortgage-backed securities 1,669 (22) - - 1,669 (22)
Municipal securities - - - - - -
Corporate securities 809 (1) - - 809 (1)
Equity securities 214 (4) - - 214 (4)
-------- ------ -------- ------ -------- ------
$14,008 $(276) $ - $ - $14,008 $(276)
======== ====== ======== ====== ======== ======
|
Unrealized losses on available for sale securities have not been recognized into income because the issuers' bonds are of high credit quality (rated AA or higher), management has the intent and ability to hold for the foreseeable future and the decline in the fair value is largely due to an increase in market interest rates. The fair value is expected to recover as the bonds approach their maturity dates and/or market rates decline.
3. Loans Receivable
The following table summarizes the Corporation's loans receivable as of December 31:
----------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003
----------------------------------------------------------------------
Mortgage loans:
Residential first mortgage $ 69,310 $ 76,396
Home equity 31,548 30,316
Commercial 48,539 44,935
--------- ---------
149,397 151,647
Other loans:
Commercial business 23,898 26,470
Consumer 8,090 14,142
--------- ---------
31,988 40,612
--------- ---------
Total loans, gross 181,385 192,259
Less allowance for loan losses 1,810 1,777
--------- ---------
Total loans, net $179,575 $190,482
========= =========
|
Following is an analysis of the changes in the allowance for loan losses for the years ended December 31:
-------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
-------------------------------------------------------------------
Balance at the beginning of the year $1,777 $1,587 $1,464
Provision for loan losses 290 330 381
Loans charged-off (318) (205) (331)
Recoveries 61 65 73
------- ------- -------
Balance at the end of the year $1,810 $1,777 $1,587
======= ======= =======
|
Non-performing loans, which include primarily non-accrual loans, were $840,000 and $1.3 million at December 31, 2004 and 2003, respectively. The Corporation is not committed to lend significant additional funds to debtors whose loans are on non-accrual status. At December 31, 2004 and 2003, the recorded investment in loans considered to be impaired was $441,000 and $821,000, respectively, against which approximately $104,000 and $202,000, respectively, of the allowance for loan losses was allocated. During 2004, 2003 and 2002, impaired loans averaged $635,000, $728,000 and $789,000, respectively. The Corporation recognized interest income on impaired loans of approximately $27,000, $29,000 and $13,000, on a cash basis, during 2004, 2003 and 2002, respectively. Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories whereas other loans may be included in only one category.
3. Loans Receivable (continued)
The Corporation conducts its business through 10 offices in Venango, Butler, Clarion, Clearfield, Elk and Jefferson counties, Pennsylvania and primarily lends in this geographical area. The Corporation does not have any significant concentrations of credit risk to any one industry or customer.
The Corporation was servicing loans with unpaid principal balances of $2.5 million and $2.8 million at December 31, 2004 and 2003, respectively, for a third party investor. Such loans are not reflected in the consolidated balance sheet and servicing operations result in the generation of annual fee income of approximately 0.25% of the unpaid principal balances of such loans.
4. Federal Bank Stocks
The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and the Federal Reserve Bank of Cleveland (FRB). As a member of these federal banking systems, the Bank maintains an investment in the capital stock of the respective regional banks, at cost. These stocks are purchased and redeemed at par as directed by the federal banks and levels maintained are based primarily on borrowing and other correspondent relationships. The Bank's investment in FHLB and FRB stocks was $1.398 million and $333,000, respectively, at December 31, 2004, and $1.649 million and $333,000, respectively, at December 31, 2003.
5. Premises and Equipment
Premises and equipment at December 31 are summarized by major classification as follows:
-------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003
-------------------------------------------------------------------
Land $ 349 $ 349
Buildings and improvements 4,571 4,201
Leasehold improvements 694 696
Furniture, fixtures and equipment 4,245 3,532
Construction in progress 18 456
------- -------
9,877 9,234
Less accumulated depreciation and amortization 4,511 4,011
------- -------
$5,366 $5,223
======= =======
|
Depreciation and amortization expense for the years December 31, 2004, 2003 and 2002 were $539,000, $404,000 and $460,000, respectively. The increase in depreciation expense between 2004 and 2003 was the additional expense incurred as a result of our renovations to the headquarters in Emlenton and also the addition of new data processing equipment. Offsetting the increase in accumulated depreciation was the disposal of assets of $39,000.
5. Premises and Equipment (continued)
Rent expense under non-cancelable operating lease agreements for the years ended December 31, 2004, 2003 and 2002 was $108,000, $124,000 and $146,000, respectively. Rent commitments under non-cancelable long-term operating lease agreements for certain branch offices for the years ended December 31, are as follows, before considering renewal options that are generally present:
------------------------------------------------------
(Dollar amounts in thousands) Amount
------------------------------------------------------
2005 $ 109
2006 112
2007 115
2008 120
2009 122
Thereafter 217
---------------
$ 795
================
6. Goodwill and Intangible Assets
|
The following table summarizes the Corporation's acquired intangible assets as of December 31:
-------------------------------------------------------------
2004 2003
-------------------------------------------------------------
(Dollar amounts in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------------------------------------------------------------------ --------------
Core deposit intangibles $1,240 $1,218 $1,240 $1,186
Other customer relationship intangibles 20 3 - -
------------- ----------- -------------- --------------
Total $1,260 $1,222 $1,240 $1,186
============= =========== ============== ==============
|
Aggregate amortization expense for 2004 and 2003 was $36,000 and $115,000, respectively.
Amortization expense in 2005 and 2006 will be $31,000 and $7,000, respectively. All acquired intangible assets will be fully amortized in 2006.
7. Related Party Balances and Transactions
In the ordinary course of business, the Bank maintains loan and deposit relationships with employees, principal officers and directors. The Bank has granted loans to principal officers and directors and their affiliates amounting to $1.6 million and $1.7 million at December 31, 2004 and 2003, respectively. During 2004, total principal additions and total principal repayments associated with these loans were $190,000 and $198,000, respectively. Deposits from principal officers and directors held by the Bank at December 31, 2004 and 2003 totaled $4.0 million and $3.2 million, respectively.
In addition, directors and their affiliates may provide certain professional and other services to the Corporation and the Bank in the ordinary course of business. During 2004, 2003 and 2002, amounts paid to affiliates for such services totaled $104,000, $74,000 and $79,000, respectively.
8. Deposits
The following table summarizes the Corporation's deposits as of December 31:
------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003
------------------------------------- --------------------------- ----------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
------------------------------------------------------------------------------------------------
Noninterest-bearing deposits - $ 40,511 17.4% - $ 36,332 16.7%
Interest-bearing demand deposits 0.76% 80,998 34.8% 0.68% 78,468 36.1%
Time deposits 3.80% 111,365 47.8% 3.73% 102,310 47.2%
--------- ------ --------- ------
2.08% $232,874 100.0% 2.01% $217,110 100.0%
========= ====== ========= ======
|
The Corporation had a total of $24.0 million and $20.5 million in time deposits of $100,000 or more at December 31, 2004 and 2003, respectively.
Scheduled maturities of time deposits for the next five years were as follows:
(Dollar amounts in thousands) Amount %
-------------------------------------------------------------------
2005 $ 44,269 19.0%
2006 25,704 11.0%
2007 10,123 4.3%
2008 14,042 6.0%
2009 3,161 1.4%
Thereafter 14,066 6.0%
--------- -----
$111,365 47.8%
========= =====
9. Borrowed Funds
|
The following table summarizes the Corporation's borrowed funds as of December 31:
-----------------------------------------------------------------------------------
2004 2003
------------------ ------------------
Weighted Weighted
average average
(Dollar amounts in thousands) rate Amount rate Amount
-----------------------------------------------------------------------------------
FHLB advances:
Due within 12 months 0.00% $ - 1.06% $ 5,700
Due beyond 12 months but within 5 years 0.00% - 0.00% -
Due beyond 5 years but within 10 years 4.20% 15,000 4.13% 15,000
Due beyond 10 years 0.00% - 0.00% -
-------- --------
$15,000 $20,700
======== ========
|
The Bank maintains a credit arrangement with the FHLB as a source of additional liquidity. The total maximum borrowing capacity with the FHLB, excluding loans outstanding, at December 31, 2004 was $109.7 million.
10. Insurance of Accounts and Regulatory Matters
Insurance of Accounts.
The Federal Deposit Insurance Corporation (FDIC) insures deposits of account holders up to $100,000 per insured depositor. To provide this insurance, the Bank must pay an annual premium. In connection with the insurance of deposits, the Bank is required to maintain certain minimum levels of regulatory capital as outlined below.
Restrictions on Dividends, Loans and Advances.
The Bank is subject to a regulatory dividend restriction that generally limits the amount of dividends that can be paid by the Bank to the Corporation. Prior regulatory approval is required if the total of all dividends declared in any calendar year exceeds net profits (as defined in the regulations) for the year combined with net retained earnings (as defined) for the two preceding calendar years. In addition, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. As of December 31, 2004, $2.7 million of undistributed earnings of the company was available for distribution as dividends, without prior regulatory approval.
Loans or advances from the Bank to the Corporation are limited to 10 percent of the Bank's capital stock and surplus on a secured basis. Funds available for loans or advances by the Bank to the Corporation amounted to approximately $1.1 million.
Minimum Regulatory Capital Requirements.
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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 Corporation's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2004 and 2003, the Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank's category.
10. Insurance of Accounts and Regulatory Matters (continued)
The following table sets forth certain information concerning regulatory capital of the consolidated Corporation and the Bank as of the dates presented:
December 31, 2004 December 31, 2003
---------------------------------- ---------------------------------
Consolidated Bank Consolidated Bank
----------------- ---------------- ---------------- ----------------
(Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets:
Actual $23,245 12.49% $20,859 11.36% $22,018 11.72% $19,669 10.61%
For capital adequacy purposes 14,889 8.00% 14,686 8.00% 15,025 8.00% 14,837 8.00%
To be well capitalized N/A N/A 18,358 10.00% N/A N/A 18,546 10.00%
Tier 1 capital to risk-weighted assets:
Actual $20,901 11.23% $19,049 10.38% $19,520 10.39% $17,885 9.64%
For capital adequacy purposes 7,445 4.00% 7,343 4.00% 7,513 4.00% 7,418 4.00%
To be well capitalized N/A N/A 11,015 6.00% N/A N/A 11,128 6.00%
Tier 1 capital to average assets:
Actual $20,901 7.68% $19,049 7.08% $19,520 7.59% $17,885 7.00%
For capital adequacy purposes 10,882 4.00% 10,768 4.00% 10,288 4.00% 10,220 4.00%
To be well capitalized N/A N/A 13,460 5.00% N/A N/A 12,775 5.00%
|
11. Income Taxes
The Corporation and the Bank file a consolidated federal income tax return. The provision for income taxes for the years ended December 31 is comprised of the following:
----------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
----------------------------------------------------------------------
Current $ 538 $ 618 $ 984
Deferred (25) 131 (150)
------ ------ ------
$ 513 $ 749 $ 834
====== ====== ======
|
A reconciliation between the provision for income taxes and the amount computed by multiplying operating results before income taxes by the statutory federal income tax rate of 34% for the years ended December 31 is as follows:
--------------------------------------------------------------------------------------------------------
2004 2003 2002
------------------- ------------------- ------------------
% Pre-tax % Pre-tax % Pre-tax
(Dollar amounts in thousands) Amount Income Amount Income Amount Income
--------------------------------------------------------------------------------------------------------
Provision at statutory tax rate $ 1,044 34.0% $1,102 34.0% $1,051 34.0%
Increase (decrease) resulting from:
Tax free interest, net of disallowance (319) (10.4%) (312) (9.6%) (226) (7.3%)
Earnings on BOLI (53) (1.7%) (79) (2.4%) - 0.0%
Other, net (159) (5.2%) 38 1.2% 9 0.3%
-------- ---------- ------- ---------- ------- ---------
Provision $ 513 16.7% $ 749 23.2% $ 834 27.0%
======== ========== ======= ========== ======= =========
|
11. Income Taxes (continued)
The tax effects of temporary differences between the financial reporting basis and income tax basis of assets and liabilities that are included in the net deferred tax asset as of December 31 relate to the following:
----------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003
----------------------------------------------------------------------
Deferred tax assets:
Loss on securities $ 107 $ 134
Provision for loan losses 562 550
Deferred loan fees 29 39
Intangible assets 145 158
Accrued pension cost 28 -
Tax credits 314 -
Other 4 25
------- -------
Gross deferred tax assets 1,189 906
Deferred tax liabilities:
- -
Net unrealized gain on securities 647 855
Depreciation 389 302
Stock Gain 118 -
Prepaid Expenses 81 -
Loan servicing 7 10
Other 83 108
------- -------
Gross deferred tax liabilities 1,325 1,275
------- -------
Net deferred tax asset/(liability) $ (136) $ (369)
======= =======
|
The Corporation determined that it was not required to establish a valuation allowance for deferred tax assets in accordance with SFAS No. 109, "Accounting for Income Taxes," since it is more likely than not that the deferred tax asset will be realized through carry-back to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income.
12. Commitments and Legal Contingencies
In the ordinary course of business, the Corporation has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Corporation is involved in certain claims and legal actions arising in the ordinary course of business. The outcome of these claims and actions are not presently determinable; however, in the opinion of the Corporation's management, after consulting legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial statements.
13. Employee Benefit Plans
Defined Benefit Plan.
The Corporation provides pension benefits for eligible employees through a defined benefit pension plan. Substantially all employees participate in the retirement plan on a non-contributing basis and are fully vested after five years of service.
The Corporation uses a December 31 measurement date for its plans.
Information pertaining to changes in obligations and funded status of the defined benefit pension plan is as follows:
-----------------------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
-----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $2,483 $1,983 $2,117
Actual (loss) return on plan assets 204 316 (264)
Employer contribution 209 248 194
Benefits paid (78) (64) (64)
------- ------- -------
Fair value of plan assets at end of year 2,818 2,483 1,983
------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year 2,912 2,801 2,358
Service cost 158 147 186
Interest cost 187 164 169
Actuarial loss 97 235 152
Effect of Plan Amendment - (580) -
Effect of Change in Assumptions - 209 -
Benefits paid (78) (64) (64)
------- ------- -------
Benefit obligation at end of year 3,276 2,912 2,801
------- ------- -------
Funded status (plan assets less benefit obligations) (458) (429) (818)
Unrecognized prior service cost (517) (548) 1
Unrecognized net actuarial loss 923 843 586
Unrecognized transition asset (56) (65) (73)
------- ------- -------
Accrued pension cost $ (108) $ (199) $ (304)
======= ======= =======
|
13. Employee Benefit Plans (continued)
Amounts recognized in the year end balance sheet consist of:
----------------------------------------------------------------------
Pension Other
Benefits Benefits
-------------- --------------
(Dollar amounts in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------
Prepaid benefit cost $ - $ - $ - $ -
Accrued benefit cost (108) (199) - -
Intangible assets - - - -
Accumulated other comprehensive income - - - -
------ ------ ------- ------
Net amount recognized $(108) $(199) $ - $ -
====== ====== ====== ======
|
The accumulated benefit obligation for all defined benefit pension plans was $2.7 million and $2.4 million at year end 2004 and 2003, respectively.
The components of the periodic pension cost are as follows:
----------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
----------------------------------------------------------------------
Service cost $ 158 $ 147 $ 186
Interest cost 187 164 169
Expected return on plan assets (209) (176) (188)
Transition asset (8) (8) (8)
Prior service costs (10) (31) -
Recognized net actuarial (gain) loss - 47 -
------ ------ ------
Net periodic pension cost $ 118 $ 143 $ 159
====== ====== ======
|
Weighted-average actuarial assumptions include the following:
----------------------------------------------------------------------------- (Dollar amounts in thousands) 2004 2003 2002 ----------------------------------------------------------------------------- Discount rate for benefit obligations and net cost 6.30% 6.30% 6.80% Rate of increase in future compensation levels 4.50% 4.50% 4.50% Expected rate of return on plan assets 8.50% 8.50% 8.50% ----------------------------------------------------------------------------- |
13. Employee Benefit Plans (continued)
Plan Assets.
The Corporation's pension plan asset allocation at year end 2004 and 2003, target allocation for 2005, and expected long-term rate of return by asset category are as follows:
------------------------------------------------------------------------------------------------
Asset Category Target Percentage of Plan Assets Weighted-Average Expected
Allocation at Year End Long-Term Rate of Return
(Dollar amounts in thousands) 2005 2004 2003 2004
------------------------------------------------------------------------------------------------
Equity Securities 50% 52% 52% 6.0%
Debt Securities 20% 16% 18% 2.0%
Other 30% 32% 30% 0.5%
------------- ----- ---------------------------
100% 100% 8.5%
============= ===== ===========================
|
The intent of the Plan is to provide a range of investment options for building a diversified asset allocation strategy that will provide the highest likelihood of meeting the aggregate actuarial projections. In selecting the options and asset allocation strategy, the Corporation has determined that the benefits of reduced portfolio risk are best received through asset style diversification. The following asset classes or investment categories are utilized to meet the Plan's objectives: Small company stock, International stock, Mid-cap stock, Large company stock, Diversified bond, Money Market/Stable Value and Cash.
Contributions.
The Corporation expects to contribute $135,000 to its pension plan in 2005.
Estimated Future Benefit Payments.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
(Dollar amounts in thousands)
For year ended Pension Benefits
------------------------------------
2005 $ 78
2006 78
2007 77
2008 78
2009 97
2010-2014 856
Thereafter 2,012
---------------
Benefit
Obligations $ 3,276
===============
|
13. Employee Benefit Plans (continued)
Defined Contribution Plan.
The Corporation maintains a defined contribution 401(k) Plan. Employees are eligible to participate by providing tax-deferred contributions up to 20% of qualified compensation. Employee contributions are vested at all times. The Corporation makes matching contributions as approved by the Board of Directors. Matching contributions for 2004 and 2003 were $67,000 and $68,000, respectively.
Supplemental Executive Retirement Plan.
During 2003, the Corporation established a Supplemental Executive Retirement Plan (SERP) to provide certain additional retirement benefits to participating executive officers. The SERP was adopted in order to provide benefits to such executives whose benefits are reduced under the Corporation's tax-qualified benefit plans pursuant to limitations under the Internal Revenue Code. The SERP is subject to certain vesting provisions and provides that the executives shall receive a supplemental retirement benefit if the executive's employment is terminated after reaching the normal retirement age of 62. For the year ended December 31, 2004 and 2003, the Corporation recognized SERP expense of $38,000 and $33,000, respectively.
14. Financial Instruments
Fair Value of Financial Instruments.
The following table sets forth the carrying amount and fair value of the Corporation's financial instruments included in the consolidated balance sheet as of December 31:
--------------------------------------------------------------------------------
2004 2003
------------------- -------------------
Carrying Fair Carrying Fair
(Dollar amounts in thousands) amount value amount amount
--------------------------------------------------------------------------------
Financial assets:
Cash equivalents $ 14,624 $ 14,624 $ 7,703 $ 7,703
Securities 63,362 63,362 49,162 49,162
Loans held for sale 386 386 - -
Loans receivable 179,575 180,832 190,482 198,092
Federal bank stocks 1,731 1,731 1,982 1,982
Bank-owned life insurance 4,448 4,448 4,272 4,272
Accrued interest receivable 1,203 1,203 1,270 1,270
Financial liabilities:
Deposits 232,874 232,394 217,110 218,915
Borrowed funds 15,000 15,034 20,700 20,699
Accrued interest payable 577 577 477 477
--------------------------------------------------------------------------------
|
The methods and assumptions used to estimate fair value are described as follows.
14. Financial Instruments (continued)
Fair Value of Financial Instruments (continued).
Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, federal bank stocks, accrued interest receivable and payable, demand deposits, short-term debt and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and is not material.
Off-Balance Sheet Financial Instruments.
The Corporation is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and commercial letters of credit. Commitments to extend credit involve, to a varying degree, elements of credit and interest rate risk in excess of amounts recognized in the consolidated statement of financial condition. The Corporation's exposure to credit loss in the event of non-performance by the other party for commitments to extend credit is represented by the contractual amount of these commitments, less any collateral value obtained. The Corporation uses the same credit policies in making commitments as for on-balance sheet instruments. The Corporation's distribution of commitments to extend credit approximates the distribution of loans receivable outstanding.
The following table presents the notional amount of the Corporation's off-balance sheet commitment financial instruments as of December 31:
----------------------------------------------------------------------
2004 2003
--------------- -----------------
(Dollar amounts in thousands) Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------------------------------------------------------------------
Commitments to make loans $424 $ 648 $ 969 $ -
Unused lines of credit 315 12,690 1,898 9,300
----------------------------------------------------------------------
|
Commitments to make loans are generally made for periods of 30 days or less. The fixed rate loan commitments have interest rates ranging from 4.00% to 11.25% and maturities ranging from five to 30 years at both year end dates. Commitments to extend credit include agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit also include unfunded commitments under commercial and consumer lines of credit, revolving credit lines and overdraft protection agreements. These lines of credit may be collateralized and usually do not contain a specified maturity date and may be drawn upon to the total extent to which the Corporation is committed.
14. Financial Instruments (continued)
Off-Balance Sheet Financial Instruments (continued).
Standby letters of credit are conditional commitments issued by the Corporation usually for commercial customers to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. Standby letters of credit were $902,000 and $682,000 at December 31, 2004 and 2003, respectively.
15. Emclaire Financial Corp. - Condensed Financial Statements, Parent Corporation Only
Following are condensed financial statements for the parent company as of and for the years ended December 31:
---------------------------------------------------------------------------------------------
Condensed Statements of Financial Condition December 31,
(Dollar amounts in thousands) 2004 2003
---------------------------------------------------------------------------------------------
Assets:
Cash in banks $ 109 $ 93
Securities available for sale 3,157 3,204
Equity in net assets of subsidiary bank 20,981 19,963
Other assets 10 12
-------- --------
Total assets $24,257 $23,272
======== ========
Liabilities and Stockholders' Equity:
Accrued expenses and other liabilities $ 641 $ 617
Stockholders' Equity 23,616 22,655
-------- --------
Total Liabilities and Stockholders' Equity $24,257 $23,272
======== ========
|
---------------------------------------------------------------------------------------------
Condensed Statements of Operations Year Ended December 31,
(Dollar amounts in thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------
Income:
Dividends from subsidiary $1,192 $ 1,437 $ 1,373
Investment income 758 202 56
------- -------- --------
Total income 1,950 1,639 1,429
Expense:
Noninterest expense 41 91 80
------- -------- --------
Total expense 41 91 80
------- -------- --------
Income before income taxes and equity in undistributed
operating results of subsidiary 1,909 1,548 1,349
Equity in undistributed net income of subsidiary 831 966 901
------- -------- --------
Income before income taxes 2,740 2,514 2,250
Income tax expense (benefit) 183 22 (7)
------- -------- --------
Net income $2,557 $ 2,492 $ 2,257
======= ======== ========
|
15. Emclaire Financial Corp. - Condensed Financial Statements, Parent Corporation Only (continued)
---------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows Year ended December 31,
(Dollar amounts in thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------
Operating activities:
Net income $2,557 $2,492 $2,257
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed operating results of subsidiary (831) (966) (901)
Other, net (1,332) 2,176 17
------- ------- -------
Net cash provided by operating activities 394 3,702 1,373
------- ------- -------
Investing activities:
Purchases of securities (131) (748) -
Proceeds from the sale of available for sale securities 945 244 -
------- ------- -------
Net cash provided by (used) in investing activities 814 (504) -
------- ------- -------
Financing activities:
Dividends paid (1,192) (1,437) (1,373)
Payments to acquire treasury stock - (1,682) -
------- ------- -------
Net cash used in financing activities (1,192) (3,119) (1,373)
------- ------- -------
Increase in cash equivalents 16 79 -
Cash equivalents at beginning of period 93 14 14
------- ------- -------
Cash equivalents at end of period $ 109 $ 93 $ 14
======= ======= =======
|
16. Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes were as follows:
--------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
------------------------------------------------------------------------------ -------- --------
Unrealized holding gains (losses) on available-for-sale securities $ 90 $1,082 $1,041
Reclassification adjustment for gains later recognized in income (701) (170) -
------ ------- -------
Net unrealized gains (losses) (611) 912 1,038
Tax Effect 207 (310) (353)
------ ------- -------
Other comprehensive income (loss) $(404) $ 602 $ 685
====== ======= =======
|
17. Other Noninterest Expenses
The following summarizes the Corporation's other noninterest expenses for the years ended December 31:
----------------------------------------------------------------------
(Dollar amounts in thousands) 2004 2003 2002
----------------------------------------------------------------------
Telephone and data communications $ 327 $ 228 $ 287
Professional fees 223 238 273
Customer bank card processing 239 228 225
Pennsylvania shares and use taxes 202 159 189
Correspondent and courier fees 190 177 174
Postage and freight 157 172 150
Marketing and advertising 114 143 127
Printing and supplies 147 154 122
Software amortization 164 86 112
Travel, entertainment and conferences 84 98 102
Other 409 498 356
------- ------- -------
$2,256 $2,181 $2,117
======= ======= =======
|
18. Quarterly Financial Data (unaudited)
The following is a summary of selected quarterly data for the years ended December 31:
------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollar amounts in thousands, except share data) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------
2004:
-----
Interest income $3,463 $3,418 $3,521 $3,551
Interest expense 1,251 1,259 1,287 1,422
------- ------- ------- -------
Net interest income 2,212 2,159 2,234 2,129
Provision for loan losses 55 20 95 120
------- ------- ------- -------
Net interest income after provision for loan losses 2,157 2,139 2,139 2,009
Noninterest income (1) 480 521 576 958
Noninterest expense 1,950 2,008 1,949 2,002
------- ------- ------- -------
Income before income taxes 687 652 766 965
Provision for income taxes 122 129 81 181
------- ------- ------- -------
Net income $ 565 $ 523 $ 685 $ 784
======= ======= ======= =======
Basic earnings per share $ 0.45 $ 0.41 $ 0.54 $ 0.62
======= ======= ======= =======
2003:
-----
Interest income $3,544 $3,539 $3,534 $3,592
Interest expense 1,217 1,207 1,227 1,250
------- ------- ------- -------
Net interest income 2,327 2,332 2,307 2,342
Provision for loan losses 75 75 75 105
------- ------- ------- -------
Net interest income after provision for loan losses 2,252 2,257 2,232 2,237
Noninterest income 383 469 467 466
Noninterest expense 1,920 1,898 1,841 1,863
------- ------- ------- -------
Income before income taxes 715 828 858 840
Provision for income taxes 174 203 209 163
------- ------- ------- -------
Net income $ 541 $ 625 $ 649 $ 677
======= ======= ======= =======
Basic earnings per share $ 0.41 $ 0.47 $ 0.51 $ 0.53
======= ======= ======= =======
(1) Noninterest income fluctuated upward during the fourth quarter 2004 as a
result of gains on equity stocks.
|
Board of Directors and Stockholders
Emclaire Financial Corp.
Emlenton, Pennsylvania
We have audited the accompanying consolidated balance sheets of Emclaire Financial Corp. as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.
As disclosed in Note 6, during 2002 the Corporation adopted new accounting guidance for goodwill and intangible assets.
/s/ Crowe Chizek and Company LLC
--------------------------------
Crowe Chizek and Company LLC
Columbus, Ohio
March 10, 2005
|
Listings and Markets
Emclaire Financial Corp. common stock is traded on the Over the Counter Bulletin Board (OTCBB) under the symbol "EMCF." The listed market makers for the Corporation's common stock include:
Arthurs, Lestrange & Co., Inc. Ferris, Baker Watts, Inc. Boenning and Scattergood Parker Hunter, Inc. Two Gateway Center 100 Light Street 200 Bar Harbor Drive 600 Grant Street - Suite 3100 Pittsburgh, PA 15222 Baltimore, MD 21202 West Conshonhocken, PA 19428 Pittsburgh, PA 15219 Telephone: (877) 282-1941 Telephone: (800) 638-7411 Telephone: (610) 862-5360 Telephone: (412) 562-8000 |
Stock Price and Cash Dividend Information
The bid and ask price of the Corporation's common stock was $27.50 and $28.25, respectively, as of March 7, 2005. The Corporation traditionally has paid regular quarterly cash dividends.
The following table sets forth the high and low sale market prices of the Corporation's common stock as well as cash dividends paid for the quarterly periods presented:
----------------------------------------------------------------------
Market Price Cash
High Low Close Dividend
----------------------------------------------------------------------
2004:
-----
Fourth quarter $26.50 $25.50 $26.25 $0.25
Third quarter 26.25 24.75 26.00 0.23
Second quarter 26.25 24.50 26.00 0.23
First quarter 26.50 25.60 26.40 0.23
2003:
-----
Fourth quarter $26.50 $25.25 $25.75 $0.48
Third quarter 26.20 24.65 25.45 0.21
Second quarter 27.60 25.75 26.20 0.21
First quarter 27.60 21.50 27.60 0.21
----------------------------------------------------------------------
|
Number of Stockholders and Shares Outstanding
As of December 31, 2004, there were approximately 690 stockholders of record and 1,267,835 shares of common stock entitled to vote, receive dividends and considered outstanding for financial reporting purposes. The number of stockholders of record does not include the number of persons or entities who hold their stock in nominee or "street" name.
Dividend Reinvestment and Stock Purchase Plan
Common stockholders may have Corporation dividends reinvested to purchase additional shares. Participants may also make optional cash purchases of common stock through this plan and pay no brokerage commissions or fees. To obtain a plan document and authorization card call (800) 757-5755.
Corporate Headquarters
Emclaire Financial Corp.
612 Main Street
Emlenton, Pennsylvania 16373
Phone: (724) 867-2311
Website: www.farmersnb.com
Subsidiary Bank
The Farmers National Bank of Emlenton.
Annual Meeting
The annual meeting of the Corporation's stockholders will be held at 11:00 a.m., on Wednesday, May 18, 2005, at the main office building in Emlenton, Pennsylvania 16373.
Stockholder and Investor Information
Copies of annual reports, quarterly reports and related stockholder literature are available upon written request without charge to stockholders. Requests should be addressed to Shelly L. Rhoades, Treasurer of Emclaire Financial Corp., 612 Main Street, Emlenton, Pennsylvania 16373.
In addition, other public filings of the Corporation, including the Annual Report on Form 10-K, can be obtained from the Securities and Exchange Commission's website at http://www.sec.gov.
Independent Accountants
Crowe Chizek and Company LLC
5900 Landerbrook Corporate Center, Suite 205
Cleveland, OH 44124
Special Counsel
Manatt, Phelps & Phillips, LLP
1501 M Street NW, Suite 700
Washington, D.C. 20005
Registrar and Transfer Agent
Illinois Stock Transfer Company
209 West Jackson Boulevard, Suite 903
Chicago, IL 60606
www.illinoisstocktransfer.com
(800) 757-5755
Exhibit 14
EMCLAIRE FINANCIAL CORP.
CODE OF PERSONAL AND BUSINESS CONDUCT AND ETHICS
I. GENERAL POLICY STATEMENT
It is the policy of Emclaire Financial Corp. ("the Company"), the parent company of Farmers National Bank of Emlenton (collectively, the "Company") to conduct its business in accordance with the highest ethical standards in order to merit and maintain the complete confidence and trust of its clients and the public in general. This Code of Personal and Business Conduct and Ethics ("Code") addresses both business and social relationships that may present legal and ethical concerns and also sets forth a code of conduct to guide the members of the board of directors and staff members. We expect every employee, officer and director of the Company to read and understand the Code and its application to the performance of his or her business responsibilities. Directors and staff members must conduct their personal affairs and maintain their business transactions in a manner, which does not result in adverse comments or criticisms from the public or in any way damage our reputation as a responsible financial services organization. The term "staff member" refers to all officers and employees of the Company.
Because the principles described in this Code are general in nature, you should also review all applicable Company policies and procedures for more specific instruction, and contact the Human Resources Department if you have any questions.
Nothing in this Code, in any Company policies and procedures, or in other related communications (verbal or written) creates or implies an employment contract or term of employment.
We are committed to regularly reviewing and updating our policies and procedures. Therefore, this Code is subject to modification. This Code supersedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations to the extent they are inconsistent.
Ethical business conduct is critical to our business. It is our policy to fully comply with the spirit and intent of all applicable laws, rules and regulations. Violations of these laws, rules and regulations can create significant civil and/or criminal liability for you, the Company, our directors, officers and other employees. We expect you to use good judgment and high ethical standards and to refrain from any form of illegal, dishonest or unethical conduct.
We hold periodic training sessions to ensure that all employees comply with the relevant laws, rules and regulations associated with their employment, including laws prohibiting insider trading (which are discussed in further detail in Section V below). While we do not expect you to memorize every detail of these laws, rules and regulations, we want you to be able to determine when to seek advice from others. If you do have a question in the area of legal compliance, it is important that you not hesitate to seek answers from your supervisor or the Compliance Officer.
Disregard of the law will not be tolerated. You should be aware that conduct and records, including emails, are subject to internal and external audits, and to discovery by third parties in the event of government investigation or civil litigation. It is in everyone's best interests to know and comply with our legal and ethical obligations.
It is your responsibility to be familiar with the Code. Supervising officers are expected to make every reasonable effort to ensure that their subordinate staff continues to comply with the provisions of the Code.
Senior management shall administer the Code, determine matters of interpretation, and coordinate periodic changes to the Code. The continued implementation of the Code shall be accomplished by audit, examination and personnel procedures.
You are encouraged to seek the advice of the appropriate supervisor regarding questions of interpretation and of the applicability of the provisions of the Code to a particular situation.
You will be required to sign a written acknowledgment of receipt of a copy of the Code and of any subsequent changes thereto and return the form to the Human Resources Department indicating that you have received, read, understand and agree to comply with the Code. The signed acknowledgment form will be located in your personnel file.
Part of your job and ethical responsibility is to help enforce this Code. You should be alert to possible violations and report possible violations to the Human Resources Department. You must cooperate in any internal or external investigations of possible violations. Reprisal, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this Code or other Company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited.
Violations of law, this Code, or other Company policies or procedures should be reported in accordance with Section XI.
Violations of law, this Code or other Company policies or procedures by staff members can lead to disciplinary action up to and including termination.
In trying to determine whether any given action is appropriate, use the following test. Imagine that the words you are using or the action you are taking is going to be fully disclosed in the media with all the details, including your photo. If you are uncomfortable with the idea of this information being made public, perhaps you should think again about your words or your course of action.
In all cases, if you are unsure about the appropriateness of an event or action, please seek assistance in interpreting the requirements of these practices by contacting the Human Resources Department.
II. CONFLICTS OF INTEREST
Each of us has a responsibility to the Company, our stockholders and each other. Although this duty does not prevent us from engaging in personal transactions and investments, it does demand that we avoid situations where a conflict of interest might occur or appear to occur.
It is our policy that directors, officers and employees do not engage in personal conduct, which will conflict with the interest of the Company. It is important to avoid even the appearance of a conflict of interest, since the appearance can be as damaging to our reputation as an actual conflict. Whether or not a conflict of interest exists or will exist can be unclear. Conflicts of interest are prohibited unless specifically authorized as described below.
If you have any questions about a potential conflict or if you become
aware of an actual or potential conflict, and you are not an officer or
director of the Company, you should discuss the matter with your
supervisor or the Compliance Officer (as further described in Section
XI). Supervisors may not authorize conflict of interest matters without
first seeking the approval of the Compliance Officer and filing with
the Compliance Officer a written description of the authorized
activity. If the supervisor is involved in the potential or actual
conflict, you should discuss the matter directly with the Compliance
Officer. Officers and directors may seek authorization from the Audit
Committee. Factors that may be considered in evaluating a potential
conflict of interest are, among others:
o whether it may interfere with the individual's job performance, responsibilities or morale;
o whether the individual has access to confidential information;
o whether it may interfere with the job performance, responsibilities or morale of others within the organization;
o any potential adverse or beneficial impact on our business;
o any potential adverse or beneficial impact on our relationships with our customers or suppliers or other service providers;
o whether it would enhance or support a competitor's position;
o the extent to which it would result in financial or other benefit (direct or indirect) to the individual;
o the extent to which it would result in financial or other benefit (direct or indirect) to one of our customers, suppliers or other service providers; and
o the extent to which it would appear improper to an outside observer.
You and your immediate families shall not solicit, accept, or retain any benefit themselves or for any third party from any of our clients, any individual or organization doing or seeking to do business with us, or from any other individual or organization that maintains a banking relationship with us. In this context, a benefit is regarded as any type of gift, gratuity, service, loan, legacy (except from a relative), fee or compensation, or anything of monetary value.
Specific exception to this prohibition may be made if there is no, and there appears to be no, reasonable likelihood of improper influence in your performance of duties on behalf of the Company. The personal benefit, however, must be one of the following:
o normal business courtesies, such as a meal, refreshment or entertainment of reasonable value, involving no more than ordinary amenities, in the course of a meeting or other occasion, the purpose of which is to hold bona fide business discussions;
o non-cash gifts of reasonable value (under $100.00) when received at holiday time or for special occasions, such as a new job, promotion, wedding, or retirement, which represent an expression of friendship;
o gifts based upon kinship, marriage or social relationships entirely beyond and apart from any business relationship;
o unsolicited advertising and promotional material of nominal value;
o awards given by charitable, education, civic, or religions organizations for meritorious contributions or service;
o loans from other banks or financial institutions on customary terms to finance proper and usual activities such as home mortgage loans;
o discounts or rebates on merchandise or services that do not exceed those available to other clients.
Any personal benefit offered or received, other than the exceptions noted above, is to be reported by the staff member to the Compliance Officer who will review the situation and instruct the staff member as to the appropriate action. The Compliance Officer shall keep contemporaneous written records of all such disclosures. The Compliance Officer shall report any such personal benefit received directly to the Audit Committee. Directors and executive officers will report directly to the Audit Committee.
It is important to recognize that federal law makes it a crime for any officer, director, or employee of a federally-insured bank or bank holding company, directly or indirectly, to ask, solicit, accept, receive, or agree to receive any thing of value, for himself/herself or for any other person or entity, for or in connection with any transaction or business of the Company. Until recently, this federal law only applied to bribes to procure or attempt to procure a loan. However, the recent amendment to this federal bribery statute eliminates the necessity of showing that the staff member received payment in exchange for making a loan. The penalty for violating this law is a fine, imprisonment, or both. Any offer of such an improper payment should be immediately reported to the Compliance Officer.
U.S. federal and state laws limit the nature and extent of individual and corporate political participation. For example, federal law and that of many states prohibit corporate contributions to political candidates or officeholders.
Federal law and Company policy also state that the Company will not reimburse anyone for personal political contributions. The Company will not alter personal compensation in any way under any circumstances to reflect personal political contributions.
We discourage staff members from holding outside employment. In those instances where it is justified, written approval from the Human Resources Department is required. No outside employment or activity will be approved which might subject us to criticism or which will impact the staff member's productivity.
We encourage individual participation in civic activities. Normally, volunteer efforts must take place outside of regular business hours. If volunteer efforts require business time, prior approval should be obtained by the staff member from his or her manager.
Staff members are not to act, without prior written approval from the Human Resources Department, as executor, administrator, trustee, guardian or conservator, or in any outer fiduciary capacity, whether or not it is related to our business. Staff members may act as fiduciary for a family member(s) without prior approval.
It is a conflict of interest to serve as a director of any company that competes with us. Although you may serve as a director of a Company supplier, customer, developer or other business partner, our policy requires that you first obtain approval from the President and CEO before accepting a directorship for any company. Any compensation you receive should be commensurate to your responsibilities. Such approval may be conditioned upon the completion of specified actions. Serving as a director of a non-profit organization, charity or similar entity does not violate this policy and does not require approval. If you are an officer or director of the Company, you must receive prior approval from the Audit Committee.
The U.S. Foreign Corrupt Practices Act, as amended by the International Anti-Bribery and Fair Competition Act of 1998 (FCPA), makes it a crime to bribe officials of another country. The law applies to U.S. companies and their domestic and foreign subsidiaries, and their employees or agents (whether or not U.S. nationals), as well as other foreign persons who violate the law in the U.S. The FCPA has two basic parts: (1) anti-bribery provisions, and (2) accounting and record-keeping requirements.
The anti-bribery provisions make it illegal to bribe a foreign public official, political party, party official or candidate for political office, or an official of a public international organization. The FCPA defines a "bribe" as any payment, directly or indirectly, or any offer or promise to pay, anything of value (whether cash or otherwise) to the recipient for the purpose of influencing or rewarding an act or decision to obtain, retain or direct business, or for the purpose of obtaining any "improper advantage" (e.g., tax breaks, immunities, permits or priorities not otherwise earned). The FCPA's accounting and record-keeping provisions require companies to keep detailed corporate
books, records and accounts, and prohibit the falsification of those materials. The accounting and record-keeping provisions apply to domestic as well as foreign operations of publicly traded U.S. companies. These requirements complement the anti-bribery provision by preventing the creation of unreported slush funds for illegal payments. It is important to understand that the law requires strict accuracy in documentation and reporting.
These provisions can be interpreted to include relatively small sums from petty cash funds.
Consistent with the FCPA, the Company's corporate policy requires that:
o No Company employee or agent will pay or offer a "bribe" as defined in the FCPA;
o No Company employee or agent will establish any undisclosed or unrecorded fund of cash or assets for any purpose, or make any false, artificial, or misleading entries in any books or records of the Company;
o No Company employee or agents will approve or make any payment for any purpose other than that described by the document supporting the payment; and
o The Assistant Vice President/Controller must provide prior written approval before a Company employee or agent:
o Makes any payment or gift to foreign public or party officials, international public officials or foreign political candidates of more than a nominal value;
o Pays travel or lodging expenses of, or makes any substantial entertainment expenditure for, any of those officials;
o Makes any "facilitating or grease payments" to facilitate routine governmental action of more than a nominal value;
o Makes contributions to campaigns of foreign political parties, officials or candidates;
o Engages an agent, consultant, or advisor who may have dealings with foreign governments or political parties on behalf of Equifax; or
o Makes any payment arrangements where a person performing services or selling goods in one country requests that payments be made in another country ("split payments arrangements").
Anyone who is convicted of violating the FCPA is subject to substantial fines or imprisonment.
Personal finances should be managed in a manner consistent with employment in a financial institution. Staff members and their immediate families should borrow only from reputable organizations, which regularly lend money, and such borrowing must carry the prevailing rate of interest and not involve favored treatment of any kind. Borrowing from relatives is not subject to restriction. Staff members are not permitted to borrow from their co-workers, but should discuss any financial emergency with Human Resources.
Staff members should not sign on clients' accounts, act as deputy or co-renter of clients' safe deposit boxes, or otherwise represent clients. This does not include clients related to the staff member by blood or marriage. A staff member may be one of several signatures to a non-profit organization deposit account that requires two or more signatures.
While we do not intend to unreasonably limit you in your personal investment activities, it is our policy that you not enter into investment transactions which would create, or give the appearance of creating, a conflict of interest between you and the Company or between the Company and any client. Many factors should be considered in determining whether a conflict exists, including the size and nature of the investment; your ability to influence the Company's decisions; your access to confidential information of the Company or of the other company; and the nature of the relationship between the Company and the other company.
As a general rule, you should avoid conducting Company business with a relative or significant other, or with a business in which a relative or significant other is associated in any significant role. Relatives include spouse, sister, brother, daughter, son, mother, father, grandparents, aunts, uncles, nieces, nephews, cousins, step relationships and in-laws. Significant others include persons living in a spousal or familial fashion with you.
If such a related party transaction is unavoidable, you must fully disclose the nature of the related party transaction to the Company's Compliance Officer. If determined to be material to the Company by the Compliance Officer, the Company's Audit Committee must review and approve in writing in advance such related party transactions. The most significant related party transactions, particularly those involving the Company's directors or executive officers, must be reviewed and approved in writing in advance by the Company's Board of Directors. We must report all such material related party transactions under applicable accounting rules, federal securities laws, Securities and Exchange Commission rules and regulations, and securities market rules. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to this business.
The Company prohibits the employment of relatives and significant others in positions or assignments that have a financial dependence or influence (e.g., an auditing or control relationship, or a supervisor/subordinate relationship). The purpose of this policy is to prevent the organizational impairment and conflicts that are a likely outcome of the employment of relatives or significant others, especially in a supervisor/subordinate relationship. If a question arises about whether a relationship is covered by this policy, the Human Resources Department is responsible for determining whether an applicant's or transferee's acknowledged relationship is covered by this policy. The Human Resources Department shall advise all affected applicants and transferees of this
policy. Willful withholding of information regarding a prohibited relationship/reporting arrangement may be subject to corrective action, up to and including termination. If a prohibited relationship exists or develops between two employees, the employee in the senior position must bring this to the attention of his/her supervisor. The Company retains the prerogative to separate the individuals at the earliest possible time, either by reassignment or by termination, if necessary.
1. It is our policy to maintain prudent lending services to adequately supply the credit needs of our clients. Any rate concessions shall be based solely upon a borrower's creditworthiness and overall business relationship with the Company.
2. You are not in any way to represent or exercise authority on behalf of the Company, grant direct or indirect accommodations or make credit recommendations with respect to:
o members of your family;
o any individual or organization to which you or your immediate family is indebted;
o any organization with which you or your immediate family is associated or in which a material financial interest is held.
3. You may recommend loan or service accommodations to non-profit organizations for which you serve as a board member or officer, but must fully disclose this relationship at the time of recommendation. Such accommodation must be approved by a second party within normal authority guidelines.
4. Federal law prohibits any director, officer or employee of the Company from granting any loan or gratuity to any public company, examiner or assistant bank examiner, who examines the Company or has authority to examine the Company.
You may occasionally be asked by clients to comment upon the legality of a particular transaction. Since the Company cannot practice law or give legal or tax advice, staff members must exercise care in discussing transactions with clients and nothing should be said that might be interpreted as the giving of legal or tax advice.
III. CORPORATE OPPORTUNITY
Employees, officers and directors may not exploit for their own personal gain opportunities that are discovered through the use of corporate property, information or position unless the opportunity is disclosed fully in writing to the Company's Board of Directors and the Board of Directors declines to pursue such opportunity.
IV. CONFIDENTIALITY
Safeguarding the confidential financial information concerning our clients is essential in maintaining the public trust. It is our policy that such confidential information acquired by a staff member through his or her employment must be held in the strictest confidence. Such information is to be held for Company purposes and not as a basis for personal gain by a staff member. Aside from routine personal credit inquiries, information regarding a client may be released to private persons, organizations or governmental bodies that request it generally only with the written consent of the client involved or upon receipt of a legal document, such as subpoena or court order. Confidential client information should never be discussed with anyone outside the Company, and only with those within the Company who have a legitimate business need to know. This obligation to keep confidential such information continues not only while a staff member is employed by the company, but also continues after such employment ends.
Financial or other proprietary and/or confidential information regarding the Company is not to be released to any outside person or organization unless it has been published in reports to shareholders, or otherwise made available to the public through authorized news releases. All news media inquiries and other outside inquiries regarding the Company must be referred to the President/CEO.
The use or disclosure of "material inside information" subjects staff members, the Company, and third parties to whom the information is communicated, to severe penalties under federal and state securities laws. Information is "material" when there is significant likelihood that a reasonable investor would think the information is important in making an investment decision. Information is "inside" when it has not been disseminated to the public at large. Any staff member possessing such material inside information must not trade in or recommend the purchase or sale of the securities involved until the information is actually disseminated to the public. Lending personnel must not disclose confidential information on existing or proposed loan clients to investment personnel.
To further the Company's business, from time to time our confidential information may be disclosed to potential business partners. However, such disclosure should never be done without carefully considering its potential benefits and risks. If you determine in consultation with your manager and other appropriate Company management that disclosure of confidential information is necessary, you must then contact the Compliance Officer to ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. We have standard nondisclosure agreements suitable for most disclosures.
The Company and its directors, officers, employees, agents and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Company with respect to its confidential information. All government requests for information, documents or investigative interviews must be referred to the Compliance
Officer. No financial information may be disclosed without the prior approval of the Compliance Officer.
V. OBLIGATIONS UNDER SECURITIES LAWS - "INSIDER" TRADING
Directors and staff members who have access to confidential (or "inside") information are not permitted to use or share that information for stock trading purposes or for any other purpose except to conduct our business. All non-public information about the Company or about companies with which we do business is considered confidential information. To use material non-public information in connection with buying or selling securities, including "tipping" others who might make an investment decision on the basis of this information, is not only unethical, it is illegal. Information is generally considered to be "material" if a reasonable investor would likely consider it to be important in making his or her investment decision, or if the release of the information is reasonably certain to have an effect on the price of the Company's stock. You must exercise the utmost care when handling material inside information. We have adopted a separate Insider Trading Policy to which you are bound as a condition of your employment here. You should consult the Insider Trading Policy for more specific information on the definition of "material inside information" and on buying and selling our securities or securities of companies with which we do business.
VI. PROTECTION AND PROPER USE OF COMPANY'S ASSETS
Protecting the Company's assets is a key fiduciary responsibility of every employee, agent, consultant and contractor. Care should be taken to ensure that assets are not misappropriated, loaned to others, sold or donated, without appropriate authorization. All Company staff members, agents, consultants and contractors are responsible for the proper use of Company assets, and must safeguard such assets against loss, damage, misuse or theft. Staff members, agents, consultants or contractors who violate any aspect of this policy, are subject to disciplinary action including immediate termination of employment or the business relationship. Those staff members who demonstrate poor judgment in the manner in which they use any Company asset may be subject to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion. Company equipment and assets are to be used for Company business purposes only. Staff members, agents, consultants and contractors may not use Company assets for personal use, nor may they allow any other person to use Company assets. Staff members who have any questions regarding this policy should bring them to the attention of the Company's Human Resources Department.
The Company has and will continue to develop procedures covering physical access control to ensure privacy of communications, maintenance of the security of the Company communication equipment and safeguard Company assets from theft, misuse and destruction. You are personally responsible for complying with the level of access control that has been implemented in the facility where you work on a permanent or temporary basis. You must not defeat or cause to be defeated the purpose for which the access control was implemented.
You are personally responsible for all Company funds over which you exercise control. Company agents and contractors should not be allowed to exercise control over Company funds. Company funds must be used only for Company business purposes. Every Company staff member, agent, consultant and contractor must take reasonable steps to ensure that the Company receives good value for Company funds spent, and must maintain accurate and timely records of each and every expenditure. Expense reports must be accurate and submitted in a timely manner. Company staff members, agents, consultants and contractors must not use Company funds or Company guaranteed credit cards for any personal purpose.
We strive to furnish staff members with the equipment necessary to efficiently and effectively perform their jobs. Staff members must care for that equipment and to use it responsibly primarily for Company business purposes. If Company equipment is used at your home or off site, takes precautions to protect it from theft or damage, just as if it were your own. Please refer to the Company's IT Policies for additional information. If the Company no longer employs you, you must immediately return all Company equipment. While computers and other electronic devices are made accessible to employees to assist them to perform their jobs and to promote Company's interests, all such computers and electronic devices, whether used entirely or partially on the Company's premises or with the aid of the Company's equipment or resources, must remain fully accessible to the Company and, to the maximum extent permitted by law, will remain the sole and exclusive property of the Company.
Staff members, agents and contractors should not maintain any expectation of privacy with respect to information transmitted over, received by or stored in any electronic communications device owned, leased or operated in whole or in part by or on behalf of the Company. To the extent permitted by applicable law, we retain the right to gain access to any information received by, transmitted by or stored in any such electronic communications device, by and through its employees, agents, contractors or representatives, at any time, either with or without an employee's or third party's knowledge, consent or approval.
All software used by employees to conduct Company business must be appropriately licensed. Never make or use illegal or unauthorized copies of any software, whether in the office, at home or on the road, since doing so may constitute copyright infringement and may expose you and the Company to potential civil and criminal liability. In addition, use of illegal or unauthorized copies of software may subject the employee to disciplinary action, up to and including termination. The Company's Information Technology Department will inspect Company computers periodically to verify that only approved and licensed software has been installed. Any non-licensed/supported software will be removed.
The purpose of this policy is to make certain that staff members utilize electronic communication devices in a legal, ethical and appropriate manner. This policy addresses the Company's responsibilities and concerns regarding the fair and proper use of all electronic communications devices within the organization, including computers, e-mail, connections to the Internet, intranet
and extranet and any other public or private networks, voice mail, video conferencing, facsimiles and telephones. Posting or discussing information concerning our products or business on the Internet without the prior written consent of the Company's Compliance Officer is prohibited. Staff members who use E-mail for personal messages do so with the knowledge that the Company reserves the right to monitor and/or review all electronic communications if and when it deems appropriate. All E-mail messages, all Company records and the equipment and systems are Company property. Accordingly, Company employees are expected to use the E-mail system properly and not assume that their messages are confidential. Also the improper use of E-mail, e.g. for the purposes of harassment and discriminating behavior, will result in disciplinary action up to and including dismissal. Any other form of electronic communication used by employees currently or in the future is also intended to be encompassed under this policy. It is not possible to identify every standard and rule applicable to the use of electronic communications devices. You are therefore encouraged to use sound judgment whenever using any feature of our communications systems.
VII. MAINTAINING AND MANAGING RECORDS
The purpose of this policy is to set forth and convey the Company's business and legal requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm or all other media. We are required by local, state, federal, foreign and other applicable laws, rules and regulations to retain certain records and to follow specific guidelines in managing its records. Civil and criminal penalties for failure to comply with such guidelines can be severe for employees, agents, contractors and the Company, and failure to comply with such guidelines may subject the employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion.
A legal hold suspends all document destruction procedures in order to preserve appropriate records under special circumstances, such as litigation or government investigations. Legal counsel determines and identifies what types of Company records or documents are required to be placed under a legal hold. Every Company staff member, agent and contractor must comply with this policy. Failure to comply with this policy may subject the staff member, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion, and potentially to criminal prosecution.
The Compliance Officer will notify you if a legal hold is placed on records for which you are responsible. You then must preserve and protect the necessary records in accordance with instructions from the Company's legal counsel. RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST NOT BE DESTROYED, ALTERED OR MODIFIED UNDER ANY CIRCUMSTANCES. A legal hold remains effective until it is officially released in writing by the Company's legal counsel. If you are unsure whether a document has been placed under a legal hold, you should preserve and protect that document while you check with the Compliance Officer.
If you have any questions about this policy you should contact the Compliance Officer.
The integrity of our records and public disclosure depends on the validity, accuracy and completeness of the information supporting the entries to our books of account. Therefore, our corporate and business records should be completed accurately and honestly. The making of false or misleading entries, whether they relate to financial results or test results, is strictly prohibited. Our records serve as a basis for managing our business and are important in meeting our obligations to customers, suppliers, creditors, employees and others with whom we do business. As a result, it is important that our books, records and accounts accurately and fairly reflect, in reasonable detail, our assets, liabilities, revenues, costs and expenses, as well as all transactions and changes in assets and liabilities. We require that:
o no entry be made in our books and records that intentionally hides or disguises the nature of any transaction or of any of our liabilities, or misclassifies any transactions as to accounts or accounting periods;
o transactions be supported by appropriate documentation;
o the terms of sales and other commercial transactions be reflected accurately in the documentation for those transactions and all such documentation be reflected accurately in our books and records;
o employees comply with our system of internal controls; and
o no cash or other assets be maintained for any purpose in any unrecorded or "off-the-books" fund.
Our accounting records are also relied upon to produce reports for our management, stockholders and creditors, as well as for governmental agencies. In particular, we rely upon our accounting and other business and corporate records in preparing the periodic and current reports that we file with the SEC. These reports must provide full, fair, accurate, timely and understandable disclosure and fairly present our financial condition and results of operations. Employees who collect, provide or analyze information for or otherwise contribute in any way in preparing or verifying these reports should strive to ensure that our financial disclosure is accurate and transparent and that our reports contain all of the information about the Company that would be important to enable stockholders and potential investors to assess the soundness and risks of our business and finances and the quality and integrity of our accounting and disclosures. In addition:
o no employee may take or authorize any action that would cause our financial records or financial disclosure to fail to comply with generally accepted accounting principles, the rules and regulations of the SEC or other applicable laws, rules and regulations, or take any action to coerce, manipulate, mislead or fraudulently influence any independent public accountant or certified public accountant engaged in the performance of an audit or review of the Company's financial statements if that person knew, or should have known, that such action, if successful, could result in rendering the Company's financial statements materially misleading;
o all employees must cooperate fully with our internal accounting department, as well as our independent public accountants and counsel, respond to their questions with candor and provide them with complete and accurate information to help ensure that our books and records, as well as our reports filed with the SEC, are accurate and complete; and
o no employee should knowingly make (or cause or encourage any other person to make) any false or misleading statement in any of our reports filed with the SEC or knowingly omit (or cause or encourage any other person to omit) any information necessary to make the disclosure in any of our reports (or in any auditing review or examination of our financial statements) accurate in all material respects.
Any employee who becomes aware of any departure from these standards has a responsibility to report his or her knowledge promptly to a supervisor, the Compliance Officer or one of the other compliance resources described in Section XI. The falsification of any books, records or documents of the Company is grounds for dismissal.
VIII. FAIR DEALING
We strive to outperform our competition fairly and honestly. Advantages over our competitors are to be obtained through superior performance of our products and services, not through unethical or illegal business practices. Acquiring proprietary information from others through improper means, possessing trade secret information that was improperly obtained, or inducing improper disclosure of confidential information from past or present employees of other companies is prohibited, even if motivated by an intention to advance our interests. If information is obtained by mistake that may constitute a trade secret or other confidential information of another business, or if you have any questions about the legality of proposed information gathering, you must consult your supervisor or the Compliance Officer, as further described in Section XI.
You are expected to deal fairly with our customers, suppliers, employees and anyone else with whom you have contact in the course of performing your job. No staff member may take unfair advantage of anyone through misuse of confidential information, misrepresentation of material facts or any other unfair dealing practice.
Staff members involved in procurement have a special responsibility to adhere to principles of fair competition in the purchase of products and services by selecting suppliers based exclusively on normal commercial considerations, such as quality, cost, availability, service and reputation, and not on the receipt of special favors.
IX. MISCELLANEOUS GUIDELINES FOR CONDUCT
It is our policy is to require staff members to observe fair and ethical conduct in dealing with our competitors. The making of disparaging remarks regarding our competitors is deemed to be inappropriate and unethical. Our strategy is to emphasize the quality and competence of our staff and services. Staff members are prohibited from involving the Company in arrangements with its competitors which provide for the setting or controlling of rates, prices, or marketing policies.
It is our policy that we do not base the sale and/or provision of services to a client upon the condition that the client must purchase other services from us or upon the condition that the client is prohibited from dealing with other suppliers of such services.
Staff members are required to fully cooperate with the audits conducted by the Company's internal audit staff, external auditing firms, and any regulators. Questions raised by the auditors or examiners must be responded to honestly, and no adverse information in response to a question may be concealed.
It is our policy to maintain records and accounts that accurately reflect its assets, liabilities, receipts and disbursements. The falsification of any books, records or documents of the Company is grounds for dismissal.
Staff members who are assigned user codes and establish passwords for the purpose of accessing computer information are prohibited from sharing these codes and passwords with any co-worker. Staff members are also prohibited from inputting their user codes and passwords to allow a co-worker to access information at his or her terminal.
The Company provides products and services under several contracts with federal and state government agencies. Employees who are involved with those contracts must be careful to follow additional rules that apply to government contracts. Some of those rules are as follows:
o It is illegal under both U.S. federal and state law to solicit, offer, or pay any bribe or other gratuity to a public official for the purpose of influencing an official act or decision;
o It is illegal under the U.S. federal False Claims Act to file a false report or make any false statement for the purpose of either making a claim for payment from the government, or avoiding a specific payment obligation to the government.
X. WAIVERS
Any waiver of any provision of this Code for a member of the Company's Board of Directors or an executive officer must be approved in writing by the Company's Board of Directors and promptly disclosed in accordance with law. Any waiver of any provision of this Code with respect any other employee, agent or contractor must be approved in writing by the Company's Compliance Officer.
XI. COMPLIANCE STANDARDS AND PROCEDURES - REPORTING AND INVESTIGATING MISCONDUCT
To facilitate compliance with this Code, we have implemented a program
of Code awareness, training and review. We have established the
position of Compliance Officer to oversee this program. The Compliance
Officer is a person to whom you can address any questions or concerns.
The Compliance Officer, Andrew M. Hogue, can be reached at extension
223. In addition to fielding questions or concerns with respect to
potential violations of this Code, the Compliance Officer is
responsible for
o investigating possible violations of the Code;
o training new employees in Code policies;
o conducting annual training sessions to refresh employees' familiarity with the Code;
o distributing copies of the Code annually [via email] to each employee with a reminder that each employee is responsible for reading, understanding and complying with the Code;
o updating the Code as needed and alerting employees to any updates, with appropriate approval of the Audit Committee of the Board of Directors, to reflect changes in the law, Company operations and in recognized best practices, and to reflect Company experience; and
o otherwise promoting an atmosphere of responsible and ethical conduct.
Your most immediate resource for any matter related to the Code is your supervisor. He or she may have the information you need, or may be able to refer the question to another appropriate source. There may, however, be times when you prefer not to go to your supervisor. In these instances, you should feel free to discuss your concern with the Compliance Officer. If you are uncomfortable speaking with the Compliance Officer because he or she works in your department or is one of your supervisors, please contact Stan C. Simons, Vice President/Human Resources.
If you have questions about the Company policy, need guidance on
specific situations or want to report violations of the Code, see
Section B below.
If you encounter a situation or are considering a course of action and its appropriateness is unclear, discuss the matter promptly with your supervisor or the Compliance Officer; even the appearance of impropriety can be very damaging and should be avoided.
If you are aware of a suspected or actual violation of Code standards by others, you have a responsibility to report it. You are expected to promptly provide a compliance resource with a specific description of the violation that you believe has occurred, including any information you have about the persons involved and the time of the violation. Whether you choose to speak with your supervisor or the Compliance Officer, you should do so without fear of any form of retaliation. We will take prompt disciplinary action against any employee who retaliates against you, up to and including termination of employment.
Supervisors must promptly report any complaints or observations of Code violations to the Compliance Officer. The Compliance Officer will investigate all reported possible Code violations promptly and with the highest degree of confidentiality that is possible under the specific circumstances. Your cooperation in the investigation will be expected. As needed, the Compliance Officer will consult with the Human Resources department and/or the Audit Committee of the Board of Directors
If the investigation indicates that a violation of the Code has probably occurred, we will take such action as we believe to be appropriate under the circumstances. If we determine that an employee is responsible for a Code violation, he or she will be subject to disciplinary action up to, and including, termination of employment and, in appropriate cases, civil action or referral for criminal prosecution. Appropriate action may also be taken to deter any future Code violations.
Anyone can communicate with the Compliance Officer, either anonymously or by name, by any of the following methods:
o In writing, addressed to the Compliance Officer, either by internal mail or by U.S. mail to Andrew M. Hogue, Compliance Officer, Farmers National Bank, Drawer D, Emlenton, PA 16373.
o By phone at 724-867-2311,ext. 223.
o By e-mail to ahogue@farmersnb.com
Callers who wish to follow up on their call will be assigned a confidential ID number. You may also contact the Compliance Officer by any of these methods with any questions about the Code.
XII. DISCIPLINARY ACTIONS
The matters covered in this Code are of the utmost importance to the Company, its stockholders and its business partners, and are essential to the Company's ability to conduct its business in accordance with its stated values. We expect all of our directors, officers, employees, agents, contractors and consultants to adhere to these rules in carrying out their duties for the Company.
The Company will take appropriate action against any director, officer, employee, agent, contractor or consultant whose actions are found to violate these policies or any other policies of the Company. Disciplinary actions may include immediate termination of employment or business relationship at the Company's sole discretion. Where the Company has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Company will cooperate fully with the appropriate authorities.
XIII. ACKNOWLEDGMENT OF RECEIPT OF CODE OF PERSONAL AND BUSINESS CONDUCT AND ETHICS
I have received and read the Company's Code of Personal and Business Conduct and Ethics. I understand the standards and policies contained in the Company Code of Personal and Business Conduct and Ethics and understand that there may be additional policies or laws specific to my job. I further agree to comply with the Company Code of Personal and Business Conduct and Ethics.
If I have questions concerning the meaning or application of the Company Code of Personal and Business Conduct and Ethics, any Company policies, or the legal and regulatory requirements applicable to my job, I know I can consult my manager or the Human Resources Department, knowing that my questions or reports to these sources will be maintained in confidence.
I understand that my agreement with the Code of Personal and Business Conduct and Ethics does not constitute a contract of employment.
All directors, officers, and exempt employees must sign and return this form to the Human Resources Department
EXHIBIT 31.1
CERTIFICATIONS
Certification of the Principal Executive Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, David L. Cox, Chief Executive Officer and President, certify that:
1. I have reviewed this annual report on Form 10-K of Emclaire Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 29, 2005
By: /s/ David L. Cox
----------------
David L. Cox
Chairman, Chief Executive Officer and President
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EXHIBIT 31.2
Certification of the Principal Financial and Accounting Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Shelly L. Rhoades, Treasurer and Principal Financial and Accounting Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Emclaire Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 29, 2005
By: /s/ Shelly L. Rhoades
---------------------
Shelly L. Rhoades
Principal Financial and Accounting Officer
Treasurer
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Exhibit 32.1
CEO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Emclaire Financial Corp. (the "Corporation") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date here (the "Report"), I, David L. Cox, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.
/s/David L. Cox --------------- David L. Cox Chief Executive Officer March 29, 2005 |
Exhibit 32.2
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Emclaire Financial Corp. (the "Corporation") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date here (the "Report"), I, Shelly L. Rhoades, Treasurer and Principal Financial and Accounting Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.
/s/Shelly L. Rhoades -------------------- Shelly L. Rhoades Principal Financial and Accounting Officer Treasurer March 29, 2005 |