As filed with the Securities and Exchange Commission on October 16, 1996
Registration No. 333-11773
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM SB-2
Registration Statement
Under the
Securities Act of 1933
EMCLAIRE FINANCIAL CORP.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 6021 25-1606091
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(State or Other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
612 Main Street, Box D, Emlenton, Pennsylvania 16373
(412) 867-2311
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(Address and telephone number of principal executive offices)
Ronald L. Ashbaugh, President
Emclaire Financial Corp.
612 Main Street, Box D, Emlenton, Pennsylvania 16373
(412) 867-2311
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Gregory A. Gehlmann, Esq.
Michael W. Zarlenga, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
PROSPECTUS
[EMCLAIRE FINANCIAL CORP. LOGO]
Holding Company of
The Farmers National Bank of Emlenton
200,800 SHARES
COMMON STOCK
Emclaire Financial Corp., a Pennsylvania corporation (the "Company") and
the holding company for The Farmers National Bank of Emlenton (the "Bank"), is
offering for sale up to 200,800 shares of its common stock, $1.25 par value per
share (the "Common Stock") at a price of $13.50 per share (the "Offering
Price"). There is no minimum number of shares required to be sold in the
Offering. The offering made hereby is referred to herein as the "Offering." The
Company reserves the right, in its sole discretion to accept or reject, in whole
or in part, any or all orders for shares in the Offering, either at the time of
receipt of an order or as soon as practicable following termination of the
Offering. The Offering will terminate at _____ p.m. local time, Emlenton,
Pennsylvania on ___________, 1996 (the "Expiration Date") unless extended at the
Company's discretion for up to an additional 30 day period. Prior to the
Offering, there has been no public market for the Common Stock. Unless the
context otherwise requires, references to the "Company" include Emclaire
Financial Corp. and The Farmers National Bank of Emlenton, its only operating
subsidiary.
All subscriptions are irrevocable. No minimum number of shares is required
to be sold by the Company in the Offering. If at the Expiration Date less than
all of the shares offered shall have been subscribed for, subscriptions that
have been received by the Company shall remain effective and the Offering shall
terminate with respect to the unsubscribed shares.
The Company has engaged Hopper Soliday & Co., Inc. ("Hopper Soliday"), a
registered broker-dealer, to provide financial advice and to assist, on a "best
efforts" basis, in the solicitation of subscriptions to purchase shares in the
Offering. In addition, Hopper Soliday may establish a selling group (the
"Selling Group") that may include Hopper Soliday and enter into selected dealer
agreements with each member of the Selling Group to assist in the sale of the
shares in the Offering. Neither Hopper Soliday nor any member of the Selling
Group will have any obligation to purchase or accept any shares of the Common
Stock. See "Plan of Distribution - Financial Advisor."
SEE "RISK FACTORS" ON PAGE 1 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF THE BANK OR THE COMPANY AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, BANK INSURANCE FUND, OR ANY OTHER GOVERNMENTAL
AGENCY, AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Offering Estimated Underwriting Estimated Proceeds to
Price Commissions and Other Expenses Company
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ...................... $13.50 $1.05 $12.45
- -----------------------------------------------------------------------------------------------------------
Total (2)....................... $2,710,800 $210,000 $2,500,800
===========================================================================================================
</TABLE>
(1) Includes $125,000 of estimated underwriting commissions to be paid to
Hopper Soliday and other broker-dealers who participate in the Offering
and other estimated expenses the Company will be required to pay in
connection with the Offering. It is assumed for purposes of the estimates
that all of the Common Stock will be sold in the Offering. The Company has
agreed to indemnify Hopper Soliday against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
(2) The Company may increase the number of shares to be sold by 30,000 shares
to 230,800 shares pursuant to an over-allotment reserve (the
"Over-allotment Reserve") in order to permit the Company, in its sole
discretion, to satisfy unfilled orders in the Offering. In the event
30,000 additional shares are sold pursuant to the Over-allotment Reserve,
it is estimated that underwriting commissions and other expenses would be
$222,150 and estimated proceeds to the Company would be $2,893,650. See
"Plan of Distribution."
HOPPER SOLIDAY & CO., INC.
The date of this Prospectus is _________ __, 1996.
<PAGE>
THE FARMERS NATIONAL BANK
OF EMLENTON
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[MAP]
===============================================================================
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. The Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Facts that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors." Unless otherwise defined herein, capitalized terms
used in this summary have the respective meanings assigned to them elsewhere in
this Prospectus. Potential investors should read this prospectus carefully in
its entirety, including the matters set forth under "Risk Factors" at page 1.
The Company.............. The Company was incorporated in Pennsylvania in
1989 to own and control all of the capital stock
of The Farmers National Bank of Emlenton (the
"Bank"), a national banking association. The
Company is a registered bank holding company
pursuant to the Bank Holding Company Act of 1956,
as amended ("BHCA"). The Company's primary federal
regulator is the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The
Company has no employees other than executive
officers who do not receive compensation for
serving in such capacity. As of June 30, 1996, the
Company had consolidated asset, liabilities, and
shareholders' equity of $109.4 million, $100.2
million, and $9.2 million, respectively.
The Company's principal executive office is
located at the main office of the Bank at 612 Main
Street, Emlenton, Pennsylvania 16373 and its
telephone number is (412) 867-2311.
The Bank................. The Bank was organized on May 16, 1900 as a
national banking association. The Bank's deposits
are insured up to the legal maximum by the Bank
Insurance Fund ("BIF") as administered by the
Federal Deposit Insurance Corporation ("FDIC").
The Bank operates under the supervision of the
Office of the Comptroller of the Currency (the
"OCC"), however, as a BIF insured institution, the
Bank is also subject to regulation by the FDIC.
See "Business - Supervision and Regulation."
The Bank operates as a full-service community
bank, offering a variety of financial services to
meet the needs of the markets served. Those
services include, accepting time and demand
deposits from the general public and together with
other funds, using the proceeds to originate
secured and unsecured commercial and consumer
loans, finance commercial transactions and provide
construction and mortgage loans, as well as home
equity and personal lines of credit. In addition,
funds are also used to purchase investment and
mortgage- backed securities.
Financial and strategic highlights of the Bank
include:
o History of profitability and dividends.
During each of the four years ended December
31, 1995, the Company generated returns on assets
in excess of 1.00% and returns on equity in excess
of 13.50%. Further, the Company, and before the
Company's formation in 1989, the Bank, have paid
cash dividends every year for at least the past
forty years. Management realizes that significant
expansion efforts tend to depress profitability
(i)
<PAGE>
ratios in the short term, but management believes
that such expansion efforts are necessary in order
to build the Company's franchise and shareholder
value. The Company's last major expansion effort
occurred in 1990, and indeed, profitability ratios
were depressed, although still adequate, in 1991.
In 1992, the Company returned to its historical
levels of return on assets in excess of 1.00% and
return on equity in excess of 13.50%. While there
can be no assurance that the Company's results
will return to these levels after the current
expansion efforts, management believes that its
prior experience in such efforts is a positive
factor with regard to the potential for positive
future results. See "Recent Developments," "Use of
Proceeds," and "Business - General."
o Core deposits and customer service.
At June 30, 1996, 14.92% of the Bank's deposits
were comprised of non-interest bearing demand
deposits and 59.31% were checking, savings, and
money market accounts. Management believes that
the Bank's focus on personalized customer service
is the primary reason for the relatively high
percentages of transaction and savings accounts.
This base of core deposits is a relatively stable
and low cost source of funds compared to
certificates of deposit which tend to be more
price-sensitive and volatile in nature. This base
of core deposits is also an important factor in
the Bank's ability to maintain a favorable net
interest margin.
o Insider ownership and focus on shareholder
value.
As of August 20, 1996, directors and management
owned approximately 29% of the Company's common
stock. While this level of ownership does permit
the directors and officers to strongly influence
certain corporate decisions, more importantly, in
management's opinion, it tends to align the
interests of the directors and officers with the
interest of the other shareholders of the Company.
Management believes that this level of insider
ownership causes a focus on shareholder value and
that decisions regarding acquisitions, lending,
product pricing, operating expenses, and fixed
asset investment receive a high level of scrutiny
because of this factor.
Common Stock Offered...... 200,800 shares(1)
Common Stock Outstanding
After the Offering........ 1,000,000 shares(1)
Estimated Net Proceeds to
the Company.............. $2,500,800(1)
Use of Proceeds.......... For general corporate purposes, including to
provide additional equity capital to support
future growth, including possible future
acquisitions of other financial institutions,
their branches or deposits. There are currently no
written or oral agreements or understandings with
respect to any such acquisitions other than as set
forth under "Recent Developments - Branch
Acquisition." Pending their longer-term uses, the
net proceeds will be invested in short-term
investment grade obligations. See "Use of
Proceeds."
Escrow.............. All funds received in payment of the purchase
price will be held by the Company in a
non-interest bearing escrow account at the Bank.
(ii)
<PAGE>
Risk Factors......... See "Risk Factors."
Recent Developments.. On May 3, 1996, the Bank and Mellon Bank, N.A.
("Mellon Bank") entered into a purchase and
assumption agreement whereby the Bank is to
purchase the furniture, fixtures, equipment,
building, and land, and assume the deposits of and
purchase certain loans of a branch office of
Mellon Bank located in Knox, Pennsylvania. The
acquisition was completed on September 20, 1996.
See "Recent Developments - Branch Acquisition."
Expiration of the
Offering................. The Offering will expire at __:__ _.m., Eastern
Time, on ________ __, 1996, unless extended by the
Company.
(1) Assumes no exercise of the Over-allotment Reserve for an additional
30,000 shares of Common Stock. See "Plan of Distribution."
(iii)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial and other data of the
Company. The financial data is derived in part, and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
presented elsewhere in the Prospectus. Operating results for the six months
ended June 30, 1996, are not necessarily indicative of the results that may be
obtained for the entire year ending December 31, 1996 or any other period.
Selected Financial and Other Data
<TABLE>
<CAPTION>
At
June 30, At December 31,
1996 1995 1994 1993 1992 1991
-------- ---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Information)
<S> <C> <C> <C> <C> <C> <C>
Assets ......................... $109,398 $ 98,599 $ 96,714 $ 94,781 $ 91,520 $ 87,474
Deposits ....................... 94,650 88,944 87,986 86,996 84,014 80,786
Loans .......................... 63,446 64,322 64,086 61,378 60,365 46,956
Allowance for loan losses ...... 724 687 688 639 573 488
Investment securities .......... 38,666 26,361 25,436 23,180 18,795 29,717
Stockholders' equity ........... 9,191 9,032 8,155 7,397 6,654 5,961
Shares outstanding(1) .......... 799,200 799,200 799,200 799,200 799,200 800,000
Book value per share at period
end(1) ....................... $ 11.50 $ 11.30 $ 10.20 $ 9.26 $ 8.33 $ 7.45
Number of:
Full time equivalent employees 69 52 47 47 47 47
Banking offices .............. 5 4 4 4 4 4
</TABLE>
- ------------------
(1) Adjusted for the 4-for-1 stock split effected June 20, 1996.
Selected Financial Ratios
<TABLE>
<CAPTION>
At
June 30, At December 31,
----------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net loans as percent of deposits 66.27% 1.55% 72.05% 69.82% 71.17% 57.52%
Equity to assets ....................... 8.40 9.16 8.43 7.80 7.27 6.81
Allowance for loan losses to total loans 1.14 1.07 1.07 1.04 0.95 1.04
Non-performing loans to total loan loans 1.72 0.42 0.77 1.02 1.06 1.41
Allowance for loan losses to non-
performing loans ..................... 66.30 253.51 138.71 101.75 89.95 73.49
Non-performing loans to total assets.... 1.00 0.27 0.51 0.66 0.70 0.76
Average interest-earning assets to total
assets ............................... 94.25 94.11 92.11 92.62 92.60 92.63
Average interest bearing liabilities to
assets ............................... 77.03 77.26 78.36 79.84 80.94 80.62
</TABLE>
(iv)
<PAGE>
Summary of Operations
The following table summarizes the Company's results of operations for
each of the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- -------- -------- --------- -------- -----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $3,766 $3,595 $7,437 $6,751 $6,772 $7,144 $6,454
Interest expense.......... 1,539 1,438 2,986 2,573 2,651 3,256 3,539
----- ----- ----- ----- ----- ----- -----
Net interest income....... 2,227 2,157 4,451 4,178 4,121 3,888 2,915
Provision for loan losses. 72 72 143 132 180 165 170
----- ----- ----- ----- ----- ----- -----
Net interest income after
provision for loan losses 2,155 2,085 4,308 4,046 3,941 3,723 2,745
Other income.............. 195 193 389 384 301 299 322
Other expense ............ 1,625 1,531 3,005 2,899 2,780 2,678 2,361
----- ----- ----- ----- ----- ----- -----
Income before income taxes
and cumulative effect
adjustment.............. 725 747 1,692 1,531 1,462 1,344 706
Applicable income tax expense 224 226 520 454 450 432 219
----- ----- ----- ----- ----- ----- -----
Net income before cumulative
effect adjustment....... 501 521 1,172 1,077 1,012 912 487
Cumulative effect adjustment (1) -- -- -- -- 31 -- --
----- ----- ----- ----- ----- ----- -----
Net income................ $ 501 $ 521 $1,172 $1,077 $1,043 $ 912 $ 487
===== ===== ===== ===== ===== ====== ======
Per Share Data (2)
Earnings per share:
Prior to cumulative effect
adjustment.............. $0.63 $0.65 $1.47 $1.35 $1.27 $1.14 $ 0.64
Cumulative effect adjustment (1) -- -- -- -- 0.04 -- --
----- ----- ----- ----- ----- ----- -----
Earnings per share........ $0.63 $0.65 $1.47 $1.35 $1.31 $1.14 $0.64
===== ===== ===== ===== ===== ====== ======
Dividends paid............ $0.21 $0.20 $0.45 $0.40 $0.38 $0.27 $0.22
Average number of shares
outstanding............. 799,200 799,200 799,200 799,200 799,200 799,612 762,688
</TABLE>
- -------------
(1) Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109.
(2) Adjusted for the 4-for-1 stock split effected June 20, 1996.
(v)
<PAGE>
Key Operating Ratios
The table below sets forth certain performance ratios for the Company for
the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, (1) Year Ended December 31,
---------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ --------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average equity............. 10.86% 12.48% 13.56% 13.80% 14.69% 14.51% 8.79%
Return on average assets............. 1.00 1.10 1.10 1.12 1.11 1.01 0.66
Net yield on average interest-earning
assets............................. 4.78 4.90 4.97 4.81 4.80 4.64 4.27
Other income to average assets....... 0.39 0.40 0.40 0.40 0.32 0.33 0.44
Other expenses to average assets..... 3.22 3.18 3.09 3.02 2.95 2.96 3.20
Dividends as a percent of net
income............................. 33.33 30.77 30.61 29.63 29.01 23.68 34.38
</TABLE>
- -------------
(1) Annualized where appropriate.
RECENT DEVELOPMENTS - BRANCH ACQUISITION
On May 3, 1996, the Bank and Mellon Bank entered into a purchase and
assumption agreement (the "Branch Acquisition") for a branch office in Knox,
Pennsylvania, which was approved by the OCC on July 26, 1996. Under the terms of
the Branch Acquisition, the Bank acquired certain assets of $129,000, assumed
deposit liabilities of $14.1 million (less a premium of 10% of deposit
liabilities assumed) and receive the net proceeds in cash. The investment and
lending activities of the branch did not transfer to the Bank. The Branch
Acquisition was consummated on September 20, 1996 and was accounted for using
the purchase method of accounting. See "- Pro Forma Consolidated Balance Sheet."
As of June 30, 1996, the cost of funds related to the deposits to be
assumed was approximately 3.63%. Management does not believe there will be a
material deposit outflow after the Branch Acquisition. The Bank has historically
priced its deposit products to be competitive in the markets served. For the six
months ended June 30, 1996, the Bank's average cost of deposits was 3.36%. It is
anticipated that this practice, combined with the level of personal service
provided, will allow the Bank to retain a significant portion of the deposits
acquired in the Branch Acquisition. In this regard, Mellon Bank has agreed not
to directly solicit the Branch Acquisition deposit customers, nor establish a
branch, loan production office, or ATM within a five mile radius of the branch
office for a period of two years.
While management does not believe the Branch Acquisition will have a
significant, long-term, adverse impact on its operations, it is expected the
Branch Acquisition will have a short-term impact on its performance and
financial position ratios, such as its return on average assets and its loans to
deposits ratio, as net cash received in the Branch Acquisition is gradually
worked into the mix of earning assets, specifically, the funding of loans.
(vi)
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1996
(Unaudited)
Emclaire Pro Forma
Financial Consolidated
Corp. Adjustments Company
---------- -------------- -------------
(In Thousands)
ASSETS
Cash and due from banks $ 4,057 $ 35 (1) $ 4,092
Federal funds sold 12,647 (1) 8,647
(4,000)(2)
Investment securities:
Available for sale 23,045 23,045
Held to maturity 15,621 15,621
Loans 63,446 26 (1) 63,472
Less: allowance for loan losse (724) (724)
Premises and equipment 2,140 68 (1) 2,208
Intangible assets 273 1,401 (1) 1,674
Other assets 1,540 1,540
------- -------
Total Assets $109,398 $119,575
======= =======
LIABILITIES
Non-interest bearing demand $ 14,121 1,117 (1) 15,238
Interest bearing demand 11,675 1,834 (1) 13,509
Savings 13,549 1,101 (1) 14,650
Money market 16,788 1,875 (1) 18,663
Certificates of deposit 38,517 8,206 (1) 46,723
-------- ----- -------
Total Deposits 94,650 108,783
Short-term borrowings 5,000 (4,000)(2) 1,000
Capital lease obligation 124 124
Other liabilities 433 44 (1) 477
-------- ----- -------
Total Liabilities 100,207 110,384
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Additional paid in capital 1,013 1,013
Retained Earnings 7,293 7,293
Unrealized gain (loss) AFS (109) (109)
Treasury stock (6) (6)
------- -------
Total Stockholders' Equity 9,191 9,191
------- -------
Total Liabilities and $109,398 $119,575
======= =======
Stockholders' Equity
(1) Branch Acquisition in Knox, Pennsylvania. Intangible assets of $1.4 million
consist of core deposit intangible of $630,000, non-compete agreement of
$25,000, and goodwill of $746,000. The core deposit, the non-compete agreement,
and goodwill will be amortized over periods of seven, two, and 15 years,
respectively.
(2) Federal Home Loan Bank ("FHLB") borrowings will be repaid from the net cash
proceeds received from the Branch Acquisition.
(vii)
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.
Effect of Acquisition and New Branch Openings
The Bank will experience an immediate increase in personnel, property, and
other expenses as a result of the Branch Acquisition. In addition, the cash
received will be invested in relatively short-term, low-yielding investments. It
is management's intention to reinvest the cash in higher-yielding loans and
other investments as soon as practicable. However, management believes, based on
its experience with prior acquisitions, that such reinvestment of funds acquired
may require twelve to twenty-four months to complete. Therefore, the Branch
Acquisition in the short term may reduce the Company's return on assets and
return on equity ratios.
Potential Impact of Changes in Interest Rates
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investment securities, and its interest expense on interest-bearing
liabilities, such as deposits. Like most financial institutions, the Bank's
interest-earning assets generally have longer terms and are less interest rate
sensitive than its liabilities. As a result, the yield on the Bank's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and the Bank's net interest income generally would
be adversely affected by material and prolonged increase in interest rates.
Conversely, the Bank's net interest income would generally be positively
affected by comparable declines in interest rates. At June 30, 1996, the Bank's
interest-bearing liabilities which were expected to mature or reprice within one
year exceeded the Bank's interest-earning assets expected to mature or reprice
during the same period by $37.2 million representing a negative cumulative
one-year interest rate sensitivity gap of 34.04% of the Bank's total assets. The
Bank will continue to be affected by general changes in levels of interest rates
and other economic factors beyond its control. See "Management's Discussion and
Analysis of Financial Condition and Plan of Operation - Asset/Liability
Management" for further discussions of the Bank's exposure to interest rate
risk.
In addition to interest income and expense considered by the "gap"
analysis described above, the market value of the Bank's interest-earning
assets, which are comprised of fixed and adjustable-rate instruments, is subject
to interest rate sensitivity. Primarily because of interest rate increases, at
June 30, 1996, the Bank had gross unrealized losses in its held to maturity
investment securities portfolios of $104,000, net of the applicable tax effect.
Generally, the market value of fixed-rate instruments fluctuates inversely with
changes in interest rates. To the extent the Company's investment securities are
classified as held to maturity, the Company will be limited in its ability to
sell these securities. Therefore, in times of rising interest rates, the Company
will realize less than market returns on these investments. Management has no
plans or intentions to sell any of the securities classified as held to
maturity. Changes in interest rates also can affect the average life of loans
and mortgage-backed securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage-backed securities. Under these
circumstances, the Bank would be subject to reinvestment risk to the extent that
it is not able to reinvest such prepayments at rates which are comparable to the
rates on the maturing loans or securities.
-1-
<PAGE>
Offering Price Not Based Solely on Market Price
The Offering Price has been determined by the Company with the assistance
of Hopper Soliday based on certain factors including recent prices of trades for
the Common Stock, an evaluation of the financial condition and performance of
the Company, and comparisons of the relationships between market prices, book
values, and earnings per share of other financial institutions of a similar size
and asset quality. The Offering Price is not based solely on recent sales prices
for the Common Stock since the Common Stock is thinly traded. Accordingly, there
can be no assurance that the Common Stock may be resold at or above the Offering
Price. See "Market Information" and "Plan of Distribution."
Absence of Active and Liquid Market for the Common Stock
Prior to the Offering, there has been no public market for the Common
Stock of the Company. Although, there can be no assurance, the Company expects
that, following the Offering, the Common Stock will be traded in the
over-the-counter market ("OTC") through the OTC "Electronic Bulletin Board."
There can be no assurance, however, that an active trading market will develop
or, if developed, will be sustained following the Offering. Hopper Soliday has
advised the Company that, upon completion of the Offering, it intends to make a
market in the Common Stock, subject to market conditions.
Making a market in securities involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company, or any market maker. Due to the relatively small size of
the Offering, when combined with the relatively small amount of Common Stock
currently outstanding, it is unlikely that a stockholder base sufficiently large
to create an active and liquid trading market for the Common Stock will develop,
or, if developed, will continue, nor can there be any assurances that purchasers
of the Common Stock will be able to sell their shares at or above the Purchase
Price. Therefore, a purchaser of the Common Stock should have a long-term
investment intent and should recognize that the absence or discontinuance of an
active trading market may make it difficult to sell the Common Stock after the
Offering and may have an adverse effect on the price of the Common Stock. See
"Market Information."
Local Economy and Limited Loan Demand
The Bank's market area is primarily comprised of Venango, Clarion, Butler
and Armstrong Counties in Pennsylvania. Although the Bank has a diversified loan
portfolio in the types of loans that comprise the portfolio, a majority of the
loans in the portfolio are concentrated in these counties. Loans outstanding to
individuals and businesses are dependent on the local economic conditions in the
Bank's primary market area and may be negatively effected by a downturn in the
local economy.
Since mid 1995, the Bank has experienced a flat market for new loan
originations. Although management believes this situation to be cyclical, this
limited loan demand and the increased competition for loan originations that the
Bank has experienced and expects to continue to experience may negatively impact
the Bank's ability to significantly expand its loan portfolio. Management
monitors current and expected loan growth and will consider other means of
generating loans should circumstances warrant such actions. Those means could
include the use of mortgage brokers to obtain loans or the purchase of loans or
participations in loans from other financial institutions. The use of mortgage
brokers or the purchase of loan participations typically involves a higher
degree of credit risk and a lower rate of return then similar loans originated
by the Bank. The higher degree of credit risk may result in the Bank
-2-
<PAGE>
experiencing an increase in the provision for possible loan losses over what has
been experience by the Bank in recent years. To minimize such risk, the Bank
would only purchase loans that are underwritten pursuant to the Bank's
underwriting standards. The lower rate of return may negatively effect the
Bank's net interest margin and net income.
Control by Management/Certain Anti-takeover Provisions
A total of 233,572 shares of Common Stock is beneficially owned by the
directors and executive officers of the Company, or 29.23% of the Common Stock
outstanding before the Offering. Hopper Soliday may offer shares of Common Stock
in the Offering to the directors and executive officers. It is expected that the
directors and executive officers will purchase approximately 19,775 shares.
Accordingly, assuming that the directors and executive officers purchase such
shares, such persons would beneficially own an aggregate of 253,347 shares of
Common Stock or approximately 25.33% of the outstanding Common Stock following
the Offering (assuming no use of the Over-allotment Reserve). See "Management -
Security Ownership of Certain Beneficial Owners and Management."
The Articles of Incorporation of the Company contain certain provisions
designed to enhance the ability to the Board of Directors to deal with attempts
to acquire control of the Company. In addition, pursuant to the Company's
Articles of Incorporation, shares of preferred stock may be issued in the future
without further shareholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as the Board of Directors may
determine. While these provisions may provide flexibility in connection with
acquisitions and other corporate purposes, they could discourage or make more
difficult a merger, tender offer or proxy contest, even though certain
shareholders may wish to participate in such a transaction. Further, such
provisions could potentially adversely affect the market price of the Common
Stock. See "Description of Capital Stock."
Competition
The Company operates in a competitive environment, competing for deposits
and loans with commercial banks, thrift institutions, and other financial
institutions. A number of mergers and consolidations involving banks in the
market in which the Bank operates have occurred recently, resulting in an
intensification of competition in the banking industry in the Company's
geographical market. The Company also competes with money market mutual funds
for funds from depositors. Many of the Company's competitors possess greater
financial resources or have substantially higher lending limits than does the
Company.
Recent changes in federal banking laws are expected to facilitate
interstate branching and merger activity among banks. Since September 1995, with
exceptions, certain bank holding companies are authorized to acquire banks
throughout the United States. In addition, on and after June 1, 1997, certain
banks will be permitted to merge with banks organized under the laws of
different states. Such changes may result in an even greater degree of
competition in the banking industry and the Company may be brought into
competition with institutions with which it does not presently compete. There
can be no assurance that the profitability of the Company will not be adversely
affected by the increased competition which may characterize the banking
industry in the future. See "Business - Competition."
-3-
<PAGE>
Best Efforts Offering
The shares of Common Stock are being offered by the Company on a "best
efforts" basis. Accordingly, there can be no assurances that all of the shares
will be sold. No minimum number of shares is required to be sold under the terms
of this Offering. All subscriptions will be irrevocable by subscribers. Those
subscriptions accepted by the Company as of the Expiration Date will constitute
the shares sold in this Offering. The Offering will expire at __:__ _.m.,
prevailing time, on ___________ __, 1996, unless further extended at the
Company's discretion without notice to subscribers, for successive periods of 15
days, up to a period of __________.
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in book value per share and tangible book value per share from the
public offering price. At June 30, 1996, the Company's book value per share was
$11.50. After giving effect to the 200,800 shares of Common Stock at a price of
$13.50 per share and to the payment of estimated offering expenses, the pro
forma book value per share would have been $11.69. This would represent an
immediate increase in book value of $0.19 per share to existing shareholders and
an immediate dilution to new investors of $1.81 per share. "Tangible book value
per share" is determined by dividing the difference between the total amount of
tangible assets and the total amount of liabilities by the number of outstanding
shares of Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be approximately $2.50 million ($2.89
million if the Over-allotment Reserve is utilized). The net proceeds will be
available for general corporate purposes, primarily to support future growth and
the financing of possible future acquisitions of other financial institutions,
their branches or deposits. There are currently no agreements or understandings
with respect to any such acquisitions other than as set forth under "Recent
Developments - Branch Acquisition." Pending their longer-term uses, the net
proceeds will be invested in short-term investment grade obligations.
MARKET INFORMATION
Prior to this Offering, there has been no established public trading
market for the Common Stock. The Company anticipates that, following the
Offering, the Common Stock will be traded on the over-the-counter market through
the OTC Electronic Bulletin Board. Hopper Soliday has advised the Company that,
upon completion of the Offering, it intends to make a market in the Common
Stock, subject to market conditions. However, a public trading market will
depend upon the presence in the market place of both willing buyers and willing
sellers at any given time. Due to the relatively small size of the Offering and
the relatively small amount of Common Stock currently outstanding, it is
unlikely that a stockholder base sufficiently large to create an active trading
market will develop and, if developed, be maintained. Therefore, a purchaser of
the Common Stock should have a long-term investment intent and should recognize
that the absence or discontinuance of an active trading market may make it
difficult to sell the Common Stock after the Offering and may have an adverse
effect on the price of the Common Stock. Additionally, the development of a
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company or any market maker.
The number of active buyers and sellers of the Common Stock at any particular
time may be limited. Under such circumstances, investors in the Common Stock
could have difficulty disposing of their shares on short notice and should not
view the Common Stock as a short-term investment.
-4-
<PAGE>
See "Plan of Distribution" for information concerning the factors
considered in determining the Offering Price. There can be no assurance that the
Offering Price will correspond to the price at which the Common Stock will trade
in the public market subsequent to the Offering. Trades in the Common Stock have
occurred infrequently on a local basis and generally involved a relatively small
number of shares. Based on information made available to it, the Company
believes that the selling price for the Common Stock during 1994, 1995, and 1996
was $10.00, $10.50, and $11.25, respectively (adjusted for the 4-for-1 stock
split effected June 20, 1996). These prices represent prices voluntarily
disclosed by buyers or sellers and do not include any retail markup, markdown,
or commission, and may not necessarily represent actual transactions. Such
transactions may not be representative of all transactions during the indicated
periods or of the actual fair market value of the Common Stock at the time of
such transaction due to the infrequency of trades and the limited market for the
Common Stock.
DIVIDENDS
The Company has paid a cash dividend every quarter since its formation in
1989. The Bank, prior to the Company's formation, has paid dividends for over 40
years. It is the intention of the Company to continue its dividend payment
policy although there can be no assurance that dividends will be paid, if any,
at historical levels following the Offering. Declaration of dividends by the
Board of Directors will depend upon a number of factors, including, but not
limited to, the amount of net proceeds from the Offering retained by the
Company, investment opportunities available to the Company or the Bank, capital
requirements, regulatory limitations, and general economic conditions.
Dividends from the Company will depend, in part, upon receipt of dividends
from the Bank, because the Company currently has no source of income other than
dividends from the Bank. The Bank may not declare or pay dividends on the Common
Stock if such payment would cause its regulatory capital to be reduced below the
minimum requirements imposed by the OCC regulations.
The Company is also subject to certain regulatory restrictions imposed by
the Federal Reserve Board on the payment of dividends to its stockholders. In
addition, the source of such dividends will be, in part, dependent upon
dividends from the Bank in addition to the net proceeds retained by the Company
and earnings thereon. The Company is also subject to the requirements of
Pennsylvania law. See "Description of Capital Stock."
-5-
<PAGE>
The following table sets forth the dividends declared per share during the
period indicated, adjusted for the 4-for-1 stock split effected June 20, 1996.
Dividend Declared
1994
First quarter.............. $0.10
Second quarter............. 0.10
Third quarter.............. 0.10
Fourth quarter............. 0.10
1995
First quarter.............. 0.10
Second quarter............. 0.10
Third quarter.............. 0.10
Fourth quarter (1)......... 0.25
1996
First quarter.............. 0.10
Second quarter............. 0.11
Third quarter.............. 0.11
(1) Includes a $0.15 per share special dividend.
-6-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996, and as adjusted to give effect to the sale of $200,800 shares of
the Common Stock offered hereby (after giving effect to the payment of estimated
offering expenses). This table should be read in conjunction with "Management's
Discussion and Analysis" and the Consolidated Financial Statements and Notes
thereto included in this Prospectus:
<TABLE>
<CAPTION>
Historical Capitalization Pro Forma Consolidated
of the Company Capitalization, as Adjusted(3)
------------------------- ------------------------------
(Dollars in Thousands)
<S> <C> <C>
Deposits(1) ............................................... $ 94,650 $ 94,650
Borrowings and other liabilities .......................... 5,558 5,558
------- -------
Total liabilities ................................... $ 100,208 $ 100,208
======= =======
Capital Stock:
Preferred stock, par value $1.00 per share................ $ -- $ --
Common stock, par value $1.25 per share
(800,000 and 1,000,000 shares issued)(2) ............... 1,000 1,250
Additional paid-in capital (2) ............................ 1,013 3,258
Treasury stock, at cost (800 and 0 shares) ................ (6) --
Net unrealized gain (loss) on securities available for sale (109) (109)
Retained earnings ......................................... 7,293 7,293
------- ------
Total stockholders' equity .......................... $ 9,191 $ 11,692
======= ======
Equity/Assets ............................................. 8.4% 10.4%
</TABLE>
- ---------------------
(1) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(2) Assumes that the Over-allotment Reserve for 30,000 shares is not utilized.
If the Over-allotment Reserve is exercised in full, Common Stock,
additional paid-in capital, and total stockholders' equity would be $1.3
million, $3.6 million, and $12.1 million, respectively.
(3) Assumes the sale of 200,800 shares of Common Stock. The pro forma
presentation does not show the impact of (a) results of operations after
the Offering, (b) changing market prices of shares of Common Stock after
the Offering, or (c) the sale of a smaller number of shares. See also "Risk
Factors - Best Efforts Offering."
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis is intended to provide information
about the financial condition and results of operation of the Company and should
be read in conjunction with the Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this prospectus.
General
The Company's results of operations are dependent on the operations of the
Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between interest income earned on its
loan and investment securities portfolios and other interest earning assets, and
its cost of funds consisting of interest expense paid on its deposits and other
interest bearing liabilities. Net interest income is also affected by the
relative amounts (volume) of interest earning assets and liabilities. The Bank's
net income is also impacted by its provision for loan losses, as well as, other
operating income and other operating expense. Other operating income consists
principally of service charges on deposit accounts, while other operating
expense is comprised of salaries and wages, occupancy expenses, and other
general and administrative expenses. Earnings of the Bank are also impacted by
general economic, competitive, and regulatory conditions, particularly changes
in market interest rates, government policy, and actions of regulatory agencies.
-7-
<PAGE>
Management Strategy
The Company's philosophy is to combine quality personal service, strategic
office locations, and technology to offer a variety of loan and deposit products
tailored to fit the needs of its customers. To further such philosophy, the
Company has installed a wide area network (WAN) and teller terminals at each
office, along with specialized loan and deposit software for the processing of
new loan and deposit accounts. The WAN allows all users either through a teller
terminal or personal computer to access customer account information in
significantly less time than could be done under the previous dedicated terminal
system.
In addition, during the first six months of 1996, the Company took
advantage of several opportunities to expand its presence in its existing market
area. This included the opening of two de novo branch office facilities: an
office in Butler commenced operations May 20, 1996; an office in Knox opened
August 12, 1996; and the planned acquisition of a third office, also located in
Knox. See "Recent Developments - Branch Acquisition." The Knox offices fit into
the Company's current operational area by bridging the market area between the
Emlenton and Clarion offices, and the Butler office expands the Bank's presence
in northern Butler County. While the Company has no further plans to expand its
branch network, Management is continually identifying and assessing
opportunities for future expansion.
Asset/Liability Management
The Company's earnings are primarily dependent on its net interest income.
Net interest income is affected by (1) the amount of interest-earning assets and
interest-bearing liabilities, (2) rates of interest earned on interest-bearing
assets and rates paid on interest-bearing liabilities, and (3) the difference
("interest rate spread") between rates of interest earned on interest-bearing
assets and rates paid on interest-bearing liabilities. To measure the
relationship of interest-earning assets and interest-bearing liabilities and
their impact on net interest income, the Company maintains an asset/liability
management program.
One of the principal functions of the Company's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates. The Company evaluates
various interest rate analysis scenarios based upon various assumptions and past
experience in accordance with the Joint Policy Statement on Interest Rate Risk
published by the Federal Reserve Board, the OCC, and the FDIC in June 1996. The
policy statement requires each institution to develop internal policies and
procedures for managing interest rate risk in accordance with the principles
provided in the policy statement. The regulatory agencies examine, as part of
their normal supervisory examination, the Company's policies and procedures
relating to interest rate risk management to ensure that the Bank's policies and
procedures are consistent with safe and sound banking practices.
Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earning assets and interest-bearing
liabilities. These differences, or interest rate repricing "gap," provide an
indication to the extent to which net interest income could be affected by
changes in interest rates. During a period of rising interest rates, a positive
gap (when interest-earning assets are greater than interest-bearing liabilities)
is desirable. A falling interest rate environment would favor a negative gap
position (when interest-earning assets are less than interest-bearing
liabilities). However, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree.
As a result, the Company's gap position is an indicator of the Company's
interest
-8-
<PAGE>
rate risk position but does not necessarily predict the impact on net interest
income given a change in interest rate levels.
-9-
<PAGE>
The following table sets forth the Company's gap position for June 30,
1996, based upon contractual repricing opportunities or maturities, with
variable rate products measured to the date of the next repricing opportunity as
opposed to contractual maturities. Fixed rate products are measured to
contractual maturity considering scheduled payment amortization for fixed rate
loans. With the exception of time deposits, all deposits are assumed to mature
within ninety days.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------------
0-90 91 Days - 1-3 3-5 5-10 Over
Balance Days 1 Year Years Years Years 10 Years
------- --------- ----------- -------- --------- ---------- --------
(Dollars in Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits .................... $ 29 $ 29 $ -- $ -- $ -- $ -- $ --
Investment securities(1) ..................... 38,392 2,840 7,081 13,466 13,382 1,623 --
Loans(2) ..................................... 63,446 17,477 5,809 11,592 9,455 14,001 5,112
--------- --------- --------- --------- --------- --------- ---------
Total earning assets ...................... 101,867 20,346 12,890 25,058 22,837 15,624 5,112
--------- --------- --------- --------- --------- --------- ---------
LIABILITIES
Interest-bearing demand ...................... 11,675 11,675 -- -- -- -- --
Savings ...................................... 13,549 13,549 -- -- -- -- --
Money market funds ........................... 16,788 16,788 -- -- -- -- --
Certificates of Deposit greater than ......... $ 4,605 718 2,139 1,361 387 -- --
Other time deposits .......................... 33,912 6,680 13,879 10,240 3,100 13 --
Federal Funds Purchased ...................... 1,000 1,000 -- -- -- -- --
FHLB borrowings .............................. 4,000 4,000 -- -- -- -- --
Capital lease obligation ..................... 124 13 31 80 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total interest bearing liabilities ........ 85,653 54,423 16,049 11,681 3,487 13 --
--------- --------- --------- --------- --------- --------- ---------
Interest rate sensitivity gap .................. 16,214 (34,077) (3,159) 13,377 19,350 15,611 5,112
Cumulative rate sensitivity gap/total assets ... (34,077) (37,236) (23,859) (4,509) 11,102 16,214
Rate sensitive assets/rate sensitive liabilities 0.37 % 0.80 % 2.15 % 6.55% 1,201.85% N/A
Interest rate sensitivity gap/total assets ..... (31.15)% (2.89)% 12.23 % 17.69% 14.27% 4.67%
Cumulative rate sensitivity gap/total assets ... (31.15)% (34.04)% (21.81)% (4.12)% 10.15% 14.82%
</TABLE>
- ----------------
(1) Includes debt securities available for sale at amortized cost. Excludes
Federal Reserve and FHLB stock.
(2) Includes nonaccrual loans.
-10-
<PAGE>
Average Balance Sheet. The following tables set forth for the periods
indicated information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996 Six Months Ended June 30, 1995
------------------------------------ -----------------------------------
Average Average
Volume Interest Yield(1) Volume Interest Yield(1)
---------- ----------- --------- --------- ---------- ----------
(Dollars in Thousands)
ASSETS
Interest-earning assets
Investment securities
<S> <C> <C> <C> <C> <C> <C>
Taxable ................................... $ 25,296 $ 735 5.82% $ 18,763 $ 492 5.24%
Exempt from federal income tax ............ 3,558 103 5.79 4,835 133 5.50
Interest-bearing deposits in other banks .... 43 1 4.65 32 1 6.25
Loans(2)(3) ................................. 63,435 2,892 9.12 64,328 2,957 9.19
Federal funds sold .......................... 2,742 77 5.62 2,524 72 5.71
------- ------ ------ -----
Total interest-earning assets ............ 95,074 3,808 8.01 90,482 3,655 8.08
------ ---- ----- ----
Noninterest-earning assets
Cash and due from banks ..................... 3,303 3,241
Allowance for loan losses ................... (705) (677)
Other assets ................................ 3,206 3,318
Total assets ............................. $ 100,878 $ 96,364
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts ................................ $ 11,582 122 2.10 $ 12,084 133 2.20
Money market accounts ....................... 15,893 256 3.22 17,711 290 3.27
Savings deposits ............................ 13,201 184 2.79 12,591 190 3.02
Time deposits ............................... 36,403 960 5.27 32,250 819 5.08
Obligation under capital lease .............. 134 4 5.97 171 6 7.02
Short-term borrowings ....................... 489 13 5.32 -- -- 0.00
------- ----- ------ -----
Total interest-bearing liabilities ....... 77,702 1,539 3.96 74,807 1,438 3.84
----- ---- ----- ----
Noninterest-bearing liabilities
Demand deposits ............................. 13,488 12,736
Other liabilities ........................... 424 395
Capital ..................................... 9,264 8,426
------- ------
Total liabilities and stockholders equity $100,878 $ 96,364
====== ======
Interest rate spread .......................... 4.05% 4.24%
==== ====
Net interest income and net yield
on interest-earning assets .................. $ 2,269 4.78% 2,217 4.90%
===== ==== ===== ====
</TABLE>
- ----------------
(1) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal income tax statutory rate of
34%.
(2) Interest on loans includes fee income.
(3) Non-accrual loans included.
-11-
<PAGE>
Average Balance Sheet (cont.)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------------------------------ ------------------------------------
Average Average
Volume Interest Yield(1) Volume Interest Yield(1)
-------- -------- -------- ------- --------- --------
(Dollars in Thousands)
ASSETS
Interest-earning assets
Investment Securities
<S> <C> <C> <C> <C> <C> <C>
Taxable .................................. $ 18,924 $ 1,034 5.46% $ 19,075 $ 935 4.90%
Exempt from federal income tax ........... 4,588 255 5.56 5,645 308 5.46
Interest bearing deposits in other banks ... 38 2 5.26 17 1 5.88
Loans(2)(3) ................................ 64,701 6,051 9.35 61,574 5,510 8.95
Federal funds sold ......................... 3,408 198 5.81 2,915 115 3.95
------ ------ ------ -----
Total interest-earning assets .............. 91,659 7,540 8.23 89,226 6,869 7.70
------ ----- ----- ----
Noninterest-earning assets
Cash and due from banks .................... 3,226 4,359
Allowance for loan losses .................. (680) (666)
Other assets ............................... 3,188 3,184
------
Total assets ............................ $ 97,393 $ 96,103
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts ............................... $ 12,217 272 2.23 $ 12,513 277 2.21
Money market accounts ...................... 16,793 554 3.30 19,533 602 3.08
Savings deposits ........................... 12,600 385 3.06 12,968 393 3.03
Time deposits .............................. 33,473 1,765 5.27 30,236 1,294 4.28
Obligation under capital lease ............. 162 10 6.17 59 7 11.86
Borrowed funds ............................. -- -- -- -- -- --
------ ----- ------ -----
Total interest-bearings liabilities 75,245 2,986 3.97 75,309 2,573 3.42
------ ----- ----- -----
Noninterest-bearing liabilities
Demand deposits ............................ 13,080 12,471
Other liabilities .......................... 431 515
Capital .................................... 8,637 7,808
------ ------
Total liabilities and stockholders'
equity ................................. $ 97,393 $ 96,103
====== ======
Interest rate spread ......................... 4.26% 4.28%
==== ====
Net interest income and net
yield on interest-earning assets ......... $ 4,554 4.97% $ 4,296 4.81%
===== ==== ===== ====
</TABLE>
- ----------------
(1) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal income tax statutory rate of
34%.
(2) Interest on loans includes fee income.
(3) Non-accrual loans included.
-12-
<PAGE>
Rate/Volume Analysis. Changes in net interest income are attributable to
three factors: (1) a change in the volume of an interest-earning asset or
interest-bearing liability, (2) a change in interest rates, or (3) a change
attributable to a combination of changes in volume and rate. The following table
sets forth certain information regarding changes in interest income and interest
expense of the Company for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (a) changes in volume (changes in volume multiplied
by the old interest rate); and (b) changes in rates (changes in interest rates
multiplied by the old average volume).
<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended December 31,
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
--------------------------- ------------------------- --------------------------
Total Change Due to Total Change Due to Total Change Due to
Change Volume(1) Rate(1) Change Volume(1) Rate(1) Change Volume(1) Rate(1)
------ --------- ------ ----- -------- ------- ------ --------- -------
(In Thousands)
INTEREST INCOME ON:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable investment securities .... $ 243 $ 184 $ 59 $ 99 $ (7) $ 106 $ (69) $ 94 $(163)
Non-taxable investments .......... (30) (37) 7 (53) (59) 6 88 82 6
Interest bearing deposits in
other banks .................... -- -- -- 1 1 -- (30) (26) (4)
Loans ............................ (65) (39) (26) 541 289 252 50 68 (18)
Federal funds sold ............... 5 6 (1) 83 22 61 (30) (63) 33
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest income ........ 153 114 39 671 246 425 9 155 (146)
---- ----- ----- ----- ----- ----- ----- ----- -----
INTEREST EXPENSE ON:
NOW accounts ..................... (11) (5) (6) (5) (8) 3 (13) 14 (27)
Money market accounts ............ (34) (29) (5) (48) (89) 41 (16) (14) (2)
Savings deposits ................. (6) 10 (16) (8) (12) 4 28 35 (7)
Time deposits .................... 141 108 33 471 150 321 (80) (58) (22)
Obligation under capital lease (2) (1) (1) 3 7 (4) 3 2 1
Borrowed funds ................... 13 13 -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest expense ........ 101 96 5 413 48 365 (78) (21) (57)
----- ----- ----- ----- ----- ----- ----- ----- -----
NET INTEREST INCOME ................ $ 52 $ 18 $ 34 $ 258 $ 198 $ 60 $ 87 $ 176 $ 89
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
-13-
<PAGE>
Comparison of Financial Condition at June 30, 1996 and December 31, 1995
Total assets at June 30, 1996 were to $109.4 million, an increase of $10.8
million or 10.95% over December 31, 1995. The increase was primarily due to a
$12.9 million increase in available-for-sale investment securities, principally
funded through an increase in deposits of $5.7 million, and a $4.0 million
short-term borrowing from the FHLB.
Loans receivable at June 30, 1996 totaled $63.4 million, a decrease of
$876,000 or 1.36% from December 31, 1995. This decline is the result of
relatively flat loan demand within the Company's market area combined with
normal amortization and repayments of existing loans. Management believes the
decline to be cyclical. Management monitors current and expected loan growth and
will consider other means of generating loans should circumstances warrant such
actions. Those means could include the use of mortgage brokers to obtain loans
or the purchase of loans or participation of loans from other financial
institutions.
Deposits of $94.7 million at June 30, 1996, represented an increase of
$5.7 million or 6.41% over December 31, 1995. The increase in deposits is
principally related to the opening of the branch office in Butler. Total
liabilities at June 30, 1996 amounted to $100.2 million, an increase of $10.6
million or 11.83% from December 31, 1995. This increase was primarily due to an
increase in deposits combined with the increase in short-term borrowings used to
fund investment securities purchases in anticipation of the acquisition of the
Knox branch office.
During the six months ended June 30, 1996, total non-performing loans
increased by $821,000. The increase was primarily due to $831,000 in loans to a
single customer being classified as impaired. See "Business - Non-Performing
Assets."
Stockholders' equity increased $158,000 or 1.75% during the first six
months of 1996, as a result of net retained earnings, which more than offset the
net unrealized loss on available-for-sale securities, which declined $175,000
net of tax the applicable effect.
Comparison of Financial Condition at December 31, 1995 and December 31, 1994
Total assets at December 31, 1995 of $98.6 million represented an increase
of $1.9 million or 1.96% from December 31, 1994. This increase was primarily the
result of increased federal funds sold of $1.6 million or 177.78% from year-end
1994, combined with an increase in investment securities of $975,000 or 3.83%
from year-end 1994.
In December 1995, in accordance with Financial Accounting Standards Board
Special Report, "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities," the Company reclassified
certain of its investment securities from the held-to-maturity classification to
the available-for-sale classification. These debt securities had an amortized
cost of $10.0 million and an unrealized gain of $44,000. The net appreciation
resulting from this transaction was recorded, net of the federal income tax
effect, to an unrealized gain account, which is a component of stockholders'
equity.
Loans receivable at December 31, 1995 of $64.3 million increased $236,000,
or 0.37%, from $64.1 million at December 31, 1994. Loan growth during 1995 was
minimal as loan demand slowed during the second half of 1995. See also "-
Comparison of Financial Condition at June 30, 1996 and December 31, 1995."
Deposits exhibited a slight increase of $957,000 or 1.09% during 1995, due
to growth in time certificates of deposit as deposit customers sought higher
rates of return.
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<PAGE>
Stockholders' equity increased $877,000 or 10.75% over year-end 1994 due
to net retained earnings combined with a $66,000 unrealized gain on
available-for-sale investment securities.
Comparison of Operating Results for the Six Months Ended June 30, 1996 and 1995
General. Net income for the first six months of 1996 totaled $501,000 or
$0.63 per share as compared to $521,000 or $0.65 per share for the same period
in 1995. The decline in net income can be attributed to several factors
including (1) start-up and operational costs for the two new offices which
amounted to $93,000 during the six months ended June 30, 1996. These costs
consist of additional employee expenses, occupancy, regulatory fees, printing
and supplies and additional advertising and promotional costs; (2) in addition
to the employees hired and trained to staff the two newest branch offices, the
board of directors and management hired, transferred, and promoted additional
personnel to staff newly created positions within the Company. These positions
include, chief financial officer, manager of human resources, secondary market
mortgage loan officer, and assistant marketing director. In addition, several
persons were hired as loan officers and management trainees at existing office
locations. As a result, the number of full time equivalent employees increased
to 69 at June 30, 1996 from 52 as of June 30, 1995; and (3) a significant
investment was made in the technological needs of the Company with the
installation of a wide area network ("WAN") and teller terminals at each office
location, along with the purchase of computer software systems for loan
originations, deposit account openings, and collections. The total cost of the
networking project is estimated to be approximately $650,000, including all
hardware and software. At September 30, 1996, approximately $563,000 had been
disbursed for this project.
With the anticipated acquisition of the second office in Knox in September
1996, it is anticipated recurring quarterly operating costs will increase by
$44,000 beginning the last quarter of 1996, $45,000 of non-recurring costs
associated with converting and supplying the office are expected to be incurred
in the third and fourth quarters of 1996. See "Recent Developments - Branch
Acquisition."
Management estimates that annual operating expenses will increase by
approximately $1.2 million, before taxes, as a result of the new branches, the
additional employees and the investment in technology. Management expects that
both interest income and fee income will increase significantly as a result of
the new branches, employees and technology, however, it is not possible to
precisely estimate such revenue increases at this time.
See "- Other Operating Expense."
Net Interest Income. Net interest income on a tax equivalent basis
increased $52,000 or 2.35% from $2.2 million for the sixth months ended June 30,
1995, due principally to an increase in interest income of $153,000 which was
partially offset by a $101,000 increase in interest expense.
The increase in interest income was derived primarily from earnings on
taxable investment securities which increased $243,000 from 1995, due to an
increase in the average balance to $25.3 million at June 30, 1996, from $18.8
million at June 30, 1995. This 34.57% increase in taxable investment securities
was funded principally by a $4.0 million short-term borrowing from the FHLB
incurred in anticipation of the purchase of the branch office in Knox, and
deposit growth at the Butler branch office location. In addition, the overall
yield on taxable investment securities increased slightly to 5.82% at June 30,
1996 from 5.24% at June 30, 1995 due to a moderate rise in market interest
rates.
The increase in investment interest income offset the decline in earnings
in both tax exempt investment securities and loans. Tax exempt securities income
on a tax equivalent basis declined $30,000 or 22.56% due to maturities of state
and local government debt issues. The tax equivalent rates available for these
types of securities during the first six months of 1996 compared unfavorably to
taxable debt instruments with similar credit and interest rate risks. As a
result, these maturities were reinvested in taxable securities. Management
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<PAGE>
continually assesses opportunities to invest in tax exempt debt securities, and
will consider such investments should future market conditions make them
favorable.
Interest income on loans for the first six months of 1996, on a tax
equivalent basis, declined $65,000 or 2.20% as compared to the same period in
1995. This decrease is due to a combined decrease in both the yield obtained and
the volume of funds invested in the loan portfolio. The average balance of loans
remained largely unchanged from 1995, declining $893,000 or 1.39%. This decline
is attributable to the relatively flat loan demand in the Bank's general market
area. Management believes the establishment of the Butler branch office will
serve to expand the Bank's lending area within the same general market. However,
as with almost all de novo operations, it will take time to establish a presence
and name recognition as a lender in the Butler area and there can be no
assurances this new branch will generate the desired level of lending.
Interest expense increased $101,000 or 7.02% during the first six months
of 1996, as compared to the same period in 1995, due primarily to the increase
in the volume of time deposits, the average balance of which increased 12.88% to
$36.4 million from the same period in 1995. As a result of the increase in time
deposits combined with borrowing from the FHLB, the cost of funds increased to
3.96% for the first six months of 1996 from 3.84% during the same period in
1995.
Provision for Loan Losses. The provision for loan losses for the six
months ended June 30, 1996 and 1995 totalled $72,000. Management makes periodic
provisions to the allowance for loan losses to maintain the allowance at an
acceptable level commensurate with management's assessment of the credit risk
inherent in the loan portfolio. See "The Business of Bank - Allowance for Loan
Losses" for a discussion of management's procedures in monitoring the adequacy
of the allowance for loan losses.
Other Operating Income. Other operating income, which is comprised
principally of fees and charges on customer deposit accounts, increased $2,000
or 1.04% from the six month periods ended June 30, 1995 to 1996. Service charges
on customer accounts increased $15,000 or 10.56%, due largely to an increase in
the number of deposit accounts. Other operating income decreased $13,000 during
the same period because of a decline in commissions received on loan and health
insurance coverage on customer loan accounts, due to the lack of loan demand
previously discussed.
Other Operating Expense. Other operating expense increased $94,000 or
6.14% during the six month period ended June 30, 1996 as compared to the same
period in 1995. Salaries and employee benefits increased $134,000 or 17.77% due
to the hiring of additional personnel, as well as the impact of normal salary
and cost increases related to existing employees. All of the 20 employees
(including six part-time employees) hired thus far in 1996 commenced employment
during the second quarter. As a result, the salaries and benefits recorded for
the first six months do not reflect the full impact of these additional
employees for the six months ended June 30, 1996. Through the first six months
of 1996, a monthly accrual of $10,000 was recorded for a discretionary year-end
bonus paid to employees and officers based upon the Bank meeting certain
earnings goals.
No further accruals are expected.
Occupancy and equipment expenses increased $23,000 or 11.73% due to
additional costs related to the operation of the Butler office, as well as the
addition of three automatic teller machines at two existing offices and an
off-site ATM location. The Butler office also has an ATM as will the new office
in Knox.
Other operating expense declined $64,000 or 11.00% for the six months
ended June 30, 1996 as compared to the same period in 1995, due primarily to a
decrease in deposit insurance premiums. During the six months ended June 30,
1995, deposit insurance premiums totaled $98,000. For the six months ended June
30, 1996, the Company paid the minimum fee of $500 per quarter. This decrease
was partially offset by increased costs for network expenses associated with the
installation of ATMs which increased $14,000 or
-16-
<PAGE>
63.64% from the same period in 1995; telephone, and printing and supplies which
increased $6,000 or 25.00% and $12,000 or 22.64%, respectively due to costs
associated with the additional branch offices. In addition, costs for consulting
and regulatory fees in connection with the Butler and Knox offices and the
purchase of the second Knox office totaled approximately $9,000. As mentioned
previously, management expects that annual operating expenses will increase by
approximately $1.2 million, before taxes, as a result of the new branches, the
additional employees and the investment in technology. The details of the
expected increase in operating expenses are summarized in the following table:
Estimated
Annualized
Category Amount
--------
Butler office............................. $ 350
Knox 338.................................. 195
Knox Main Street office................... 163
Amortization of intangible assets......... 152
Other personnel........................... 220
Computer hardware and software............ 100
-----
Total................................ $1,180
=====
The Board of Directors and management analyzed the potential effect of
each of these expenditures prior to approval and believe that these expenditures
will have an overall positive effect on the Company's franchise and shareholder
value, but also realize that the expenditures will most likely depress
profitability ratios in the short term. The Board of Directors and management
also expect that both interest income and fee income will increase significantly
as a result of the new branch offices, new employees and new technology.
However, it is not possible to precisely estimate such revenue increases, if
any, at this time.
Statements concerning future performance, developments, or events,
concerning expectations for growth and market forecasts, and any other guidance
on future periods, constitute forward-looking statements which are subject to a
number of risks and uncertainties, including interest rate fluctuations and
government and regulatory actions which might cause actual results to differ
materially from stated expectations or estimates.
Income Tax Expense. Income taxes decreased $2,000 or 0.88% during the
first six months of 1996 when compared to the same period in 1995, due to the
2.95% decline in pre-tax income.
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
General. Net income for the year ended December 31, 1995 totaled $1.2
million or $1.47 per share compared to $1.1 million or $1.35 per share for 1994.
This increase of 8.82% in net income is principally attributable to a $273,000
or 6.53% increase in net interest income, partially offset by a $106,000 or
3.66% increase in other operating expenses.
Net Interest Income. Net interest income on a tax equivalent basis
increased $258,000 or 6.01% in 1995 from 1994. This increase was the result of
an increase in interest income of $671,000 offset by an increase in interest
expense of $413,000.
Interest income increased primarily because of an increase in interest on
loans of $541,000 or 9.82% on a tax equivalent basis. This increase is the
result of an increase in the average balance of loans to $64.7 million
-17-
<PAGE>
in 1995 from an average balance of $61.6 million in 1994. Earnings on taxable
investment securities increased $99,000 due to an increase on the yield on the
portfolio. In addition, interest earnings on federal funds sold increased
$83,000 due to an increase in the yield coupled with an increase in the average
balance of federal funds sold.
The increase in interest income was partially offset by an increase in
interest expense of $413,000 in 1995 resulting principally from a $471,000 or
36.40% increase of interest paid on time deposits. This increase resulted from
an increase in the average interest rate on time deposits which increased to
5.27% for 1995 from 4.28%for 1994. In addition, the average amount of time
deposits increased 10.71% to $33.5 million in 1995. The increase in the average
balance of time deposits resulted from existing customers transferring funds
from other deposit accounts, particularly money market accounts, to take
advantage of relatively higher rates of interest available on time deposits.
As a result of the above listed factors, the net yield on earning assets
increased to 4.97% for 1995 from 4.81% for 1994.
Provision for Loan Losses. The provision for loan losses for 1995 was
$143,000, a 8.33% increase from the $132,000 provided in 1994. The increase in
the provision for loan losses was a result of management's analysis of the loan
portfolio, including the loan growth experienced by the Company starting in mid
1994 and running through mid 1995. See also "Business of the Bank - Allowance
for Loan Losses".
Other Operating Income. Other operating income increased $4,000 or 1.04%
to $389,000 for 1995. This minimal fluctuation corresponded with the relative
stability of the deposit portfolio, the average balance of which increased only
$545,000 in 1995 from 1994. Service fees on deposit accounts increased $5,000 or
1.72%, while other income declined slightly due principally to a decrease in
commissions earned on life and health insurance on customer loan accounts.
Other Operating Expense. Other operating expense for 1995 increased
$106,000 or 3.66% from 1994. The primary reason for this minimal increase was
the decrease in deposit insurance premiums which were reduced 48.21% to $101,000
for the year ended December 31, 1995 from $195,000 for the year ended December
31, 1994, due to regulations approved on August 8, 1995 which reduced the
premium for well capitalized commercial banks from 23 cents per $100 of insured
deposits to 4 cents per $100 of insured deposits. This reduced premium expense
was offset by increases to salaries and benefits of $114,000 or 7.97% in 1995
due to normal recurring salary adjustments and normal increases in employee
benefits. Furniture and equipment expense increased $22,000 or 10.53% in 1995
due principally to costs associated with maintenance contracts for data
processing equipment which increased $12,000 and miscellaneous equipment repairs
and maintenance which increased $7,000. Advertising expense increased $25,000
during 1995 as a result of an increased focus on marketing and advertising,
including print and radio commercials. Miscellaneous losses increased $37,000 in
1995 compared to 1994 due to a write down of a parcel of other real estate owned
to fair value.
Income Tax Expense. Income tax expense increased to $520,000 for 1995 from
the $454,000 recorded in 1994, representing an increase of 14.54%, due
principally to the 10.52% increase in pre-tax income, combined with a 17.24%
decrease in tax exempt securities income.
Liquidity and Capital Resources
Liquidity. Liquidity represents the Company's ability to meet normal cash
flow requirements of its customers for the funding of loans and repayment of
deposits. Liquidity is generally derived from the repayments and maturities of
loans and investment securities. Management monitors liquidity daily, and on a
monthly basis incorporates liquidity management into its asset/liability
management program.
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<PAGE>
Operating activities, as presented in the statement of cash flows in the
accompanying financial statements presented elsewhere herein, provided $323,000
in cash during the first six months of 1996, generated principally from net
income, as compared to the $781,000 provided during the same period in 1995. The
primary reason for the decrease during 1996 was an increase in accrued interest
receivable due to an increase in investment securities which generally pay
interest semi-annually.
Investing activities consist primarily of loan originations and
repayments, and investment purchases and maturities. These activities used $12.5
million in funds during the first six months of 1996, principally for the
purchase of investment securities. For the same period in 1995, financing
activities provided $2.3 million in funds, resulting from $4.1 million in
investment securities maturities, which funded $975,000 in investment purchases
and $964,000 of net loan originations.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, and the payment of dividends. During the
six months ended June 30, 1996, financing activities yielded $10.5 million in
funds, principally derived from an increase in deposit accounts, short-term FHLB
borrowings, and federal funds purchased. During the six months ended June 30,
1995, financing activities used $330,000 for deposit repayments and the payment
of dividends.
In addition to using the loan and investment portfolios as a source of
liquidity, the Company has access to funds from other sources if the need for
additional funds would arise. There are available lines of credit through the
FHLB, along with a federal funds line of credit available through the Bank's
primary correspondent bank. In addition, the Bank has access to funds through
the discount window at the Federal Reserve Bank. The Company also has a ready
source of funds through the available-for-sale component of the investment
securities portfolio.
The Company anticipates it will have sufficient funds available to meet
the needs of its customers for deposit repayments and loan fundings. At June 30,
1996, loan and letter of credit commitments totaled $5.9 million. Many of these
commitments are in the form of lines of credit and letters of credit that are
available for use by the borrower, but are generally not drawn upon.
Certificates of deposit and other time deposits scheduled to mature in one year
or less totaled $23.4 million at June 30, 1996. The planned acquisition of the
Knox office will provide an immediate source of liquidity, as the Bank will
receive cash, less a premium, in connection with the assumption of the deposit
liabilities.
Capital Resources. Capital adequacy is the ability of the Company to
support growth while protecting the interests of depositors and the deposit
insurance fund. Bank regulatory agencies have developed certain capital ratio
requirements, which are used to assist them in monitoring the safety and
soundness of financial institutions. Management continually monitors these
capital requirements and believes the Company to be in compliance with these
regulations at June 30, 1996. See also "Business - Regulation - The Bank."
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<PAGE>
The following table sets forth the Bank's regulatory capital position at
June 30, 1996, as compared to the minimum regulatory capital requirements
imposed on the Bank by the OCC at that date.
At June 30, 1996
-----------------------
Amount Percentage
--------- -----------
(Dollars in Thousands)
Tier 1 risk-based capital:
Actual......................... $9,016 14.39%
----- -----
Excess...................... $6,521 10.39%
===== =====
Total risk-based capital
Actual......................... $9,740 15.55%
Regulatory requirement......... 5,011 8.00
----- -----
Excess ..................... $4,729 7.55%
===== =====
Leverage Capital
Actual......................... $9,016 8.71%
Regulatory Requirement......... 3,105 3.00
----- ----
Excess..................... $5,911 5.71%
===== ====
Impact of Inflation and Changing Prices
The financial statements of the Company and the notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting standards, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Impact of Recent Accounting Standards
FASB Statement on Accounting for the Impairment of Long-Lived Asset and
for Long-Lived Assets to be Disposed of. In March 1995, FASB issued SFAS No.
121, which will become effective for years beginning after December 15, 1995.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this Statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
impact of adopting this Statement had no effect on the Bank's financial
position, operations or liquidity.
FASB Statement on Accounting for Mortgage Servicing Rights. In May 1995,
FASB issued SFAS No. 122, which will become effective, on a prospective basis,
for years beginning after December 31, 1995. This
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<PAGE>
Statement requires mortgage banking enterprises to recognize as separate assets
rights to service mortgage loans, however those servicing rights are acquired.
When mortgage loans, acquired either through a purchase transaction or by
origination, are sold or securitized with servicing rights retained, an
allocation of the total cost of the mortgage loans should be made between the
mortgage servicing rights and the loans based on their relative fair values. In
subsequent periods, all mortgage servicing rights capitalized must be
periodically evaluated for impairment based on the fair value of those rights,
and any impairments recognized through a valuation allowance. However, based on
existing conditions, management believes that the impact of adopting this
Statement is not material to the Bank's financial position, operations or
liquidity. Effective January 1, 1997, this Statement will be superseded by SFAS
No. 125, which is discussed below.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
years beginning after December 15, 1995. Pro forma disclosures must include the
effects of all awards granted in years beginnings after December 15, 1994. The
Company currently has no stock-based compensation plans.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for years beginning after
December 31, 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial- components approach that focuses
on control. SFAS No. 125 extends the "available for sale" and "trading" approach
of SFAS No. 115 to non-security financial assets that can be contractually
prepaid or otherwise settled in such a way that the holder of the asset would
not recover substantially all of its recorded investment. In addition, SFAS No.
125 amends SFAS No. 115 to prevent a security from being classified as held to
maturity if the security can be prepaid or settled in such a manner that the
holder of the security would not recover substantially all of its recorded
investment. The extension of the SFAS No. 115 approach to certain non-security
financial assets and the amendment to SFAS No. 115 are effective for financial
assets held on or acquired after January 1, 1997. Effective January 1, 1997,
SFAS No. 125 will supersede SFAS No. 122, which is discussed above. Management
has not yet determined the effect, if any, SFAS No. 125 will have on the
Company's financial statements.
BUSINESS
General
The Company was incorporated in Pennsylvania in 1989 to own and control
all of the capital stock of the Bank. The Company is a registered bank holding
company pursuant to the Bank Holding Company Act of 1956, as amended. The
Company has no employees other than executive officers whom do not receive
compensation for serving in such capacity. Because the Company has not engaged
in any significant business to date, almost entirely all of the business
conducted by the Company on a consolidated basis is conducted through the Bank,
its wholly owned subsidiary.
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<PAGE>
The Farmers National Bank of Emlenton was organized in 1900 as a national
banking association, and operates under the supervision of the OCC. The Bank
operated from a single office until 1978 when it opened its first branch office
in Eau Claire. A second branch was established in Clarion in 1985. During 1991,
the Bank acquired the East Brady and Emlenton branch operations of Mellon Bank.
The Emlenton office of Mellon Bank was closed and donated to the Borough of
Emlenton while the deposit accounts were transferred to the existing Emlenton
office. On May 20, 1996, a fifth office was established in Bon Aire Plaza in
Butler, and a sixth office opened on August 12, 1996 in a grocery store located
in Knox.
On September 20, 1996, the Bank completed the acquisition of a branch
facility located on Main Street in Knox from Mellon Bank, pursuant to an
agreement entered into on May 3, 1996. Under the terms of the agreement, the
Bank assumed the deposit liabilities of the office and purchased the real
estate, furniture, and equipment. The Bank paid a cash premium for the deposits
assumed based upon a percentage of the total deposits acquired. The price of the
real estate, furniture, and equipment was based upon a negotiated price. See
"Recent Developments - Branch Acquisition."
The Bank operates as a full-service community bank, offering a variety of
financial services to meet the needs of its markets served. Those services
include accepting time and demand deposits from the general public and together
with other funds, using the proceeds to originate secured and unsecured
commercial and consumer loans, finance commercial transactions and provide
construction and mortgage loans, as well as home equity and personal lines of
credit. In addition funds are also used to purchase investment and
mortgage-backed securities.
Market and Geographic Lending Area
The Bank's primary market area consists of Venango, Clarion, Butler, and
northern Armstrong Counties, Pennsylvania. The areas of service are generally
small or rural communities with populations ranging between 69 and 258 persons
per square mile. The population work force is a mix of professional, farm, and
labor. The cities of Clarion, Butler, and Oil City offer the largest population
concentrations. The average income for the counties served ranges from $21,093
to $34,498 per year. The lending areas serviced by the Bank generally consist of
customers residing or doing business within a fifteen mile radius of a branch
office.
Lending Activities
Historically, the principal lending activities of the Bank have consisted
of the origination of residential mortgage loans, commercial loans, and consumer
loans. At June 30, 1996, the Bank's loan portfolio totaled $63.4 million of
which $30.3 million or 47.81% was one-to-four family residential mortgage loans,
and $11.0 million or 17.30% of total loans were commercial loans secured by real
estate. Consumer loans comprised $12.1 million or 19.00% of the portfolio, while
commercial loans, other than those secured by real estate, totaled $9.6 million
or 15.10%.
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<PAGE>
The following table sets forth selected data related to the composition of
the Bank's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------------- -------------------------------------
1996 1995 1995 1994
------------------ ------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- --------- -------- ------- -------- -------
(Dollars in Thousands)
Commercial, industrial
<S> <C> <C> <C> <C> <C> <C> <C> <C>
and agricultural.... $ 9,579 15.10% $ 8,300 12.77% $ 9,010 14.01% $ 8,048 12.56%
Commercial and multi-
family real estate 10,979 17.30 11,436 17.60 10,969 17.05 11,478 17.91
1-4 family real estate 30,335 47.81 31,907 49.09 31,196 48.50 31,258 48.78
Consumer.............. 12,052 19.00 12,870 19.80 12,510 19.45 12,769 19.92
Other................. 501 0.79 481 0.74 637 0.99 533 0.83
------- ------ ------- ------ ------ ------ ------ ------
Total loans...... 63,446 100.00% 64,994 100.00% 64,322 100.00% 64,086 100.00%
====== ====== ====== ======
Less:
Allowance for loan
losses............ 724 687 687 688
------ ------ ------ ------
Net loans........ $62,722 $64,307 $63,635 $63,398
====== ====== ====== ======
</TABLE>
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. At June
30, 1996, 47.81% of the loan portfolio was secured by one-to-four family
residential real estate mortgages. The Bank currently offers 5, 7, 10, 15, and
20 year fixed rate mortgages as well as balloon mortgages with five and seven
year maturities. It is the Bank's general policy that borrowers will have at
least an 80% loan to value ratio at the time the loan is granted. The Bank may,
at its option, renew the balloon loans at the prevailing market rate, for the
remaining amortization term of the original loan. Monthly payments are based on
20 years for the five year balloon mortgage and 30 years for the seven year
balloon. Renewal of a balloon mortgage loan is based on the credit history, as
well as the current qualifications of the borrower at the time of renewal.
Balloon mortgages are offered in an effort to minimize the Bank's interest rate
risk exposure. Interest rates charged on fixed rate mortgage loans are
competitively priced based on local market conditions. Loan origination fees are
generally not charged by the Bank. The Bank recently received Federal Home Loan
Mortgage Corporation ("FHLMC") qualification as an approved lender. As a result,
the Bank may sell loans to and service loans for the FHLMC. While the Bank has
made no such sales to date, it anticipates the ability to sell loans to the
FHLMC will allow it develop a fixed rate 30 year mortgage product, a portion of
such loans would be sold to minimize interest rate risk exposure with servicing
retained.
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 terms of up to 15 years, or a variable rate revolving line of
credit. These loans are made only on owner-occupied single-family residences.
These loans are generally subject to an 80% combined loan-to-value ratio,
including any other outstanding mortgages or liens. The Bank offers a variable
rate home equity line of credit which adjusts quarterly based on the 91 day
Treasury bill rate plus 400 basis points.
-23-
<PAGE>
Commercial and Commercial Real Estate Loans. Commercial lending
constitutes a significant portion of the Bank's lending activities comprising a
combined total of 32.40% of the total loan portfolio at June 30, 1996.
Commercial real estate loans generally consist of loans granted for commercial
purposes secured by commercial or other nonresidential real estate. Commercial
loans consist of secured and unsecured loans for such items as capital assets,
inventory, operating funds, and other commercial purposes. Approximately 60% of
all commercial and commercial real estate loans have variable interest rates
based on the prime lending rate as published in the Wall Street Journal.
Commercial real estate loans generally have maturities ranging from 5 to 15
years. Commercial loans consist of lines of credit subject to annual review and
renewal or single advance fixed term loans with maturities generally ranging
from 1 to 10 years.
Consumer Loans. Consumer loans comprised approximately 19.00% of the loan
portfolio at June 30, 1996. In general, these loans consist of fixed rate term
loans for automobile purchases, home improvements not secured by real estate,
capital, and other personal expenditures. Such loans are granted to qualifying
borrowers at competitive interest rates. In addition, the Bank funds education
loans under various government guaranteed student loan programs. Education loans
totaled approximately $3.6 million at June 30, 1995. These loans are serviced
for the Bank by a third party. The Bank also offers unsecured revolving personal
lines of credit and overdraft protection. Such loans do not currently comprise a
significant portion of the consumer loan portfolio.
Loan Underwriting Risks. Adjustable-rate mortgage loans decrease the risks
associated with changes in interest rates by periodically repricing, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic interest rate adjustment permitted by the
adjustable-rate mortgage loan documents, and, therefore is potentially limited
in effectiveness during periods of rapidly rising interest rates. These risks
have not had an adverse effect on the Bank.
While commercial real estate and consumer or other loans provide benefits
to the Bank's asset/liability management program by reducing the Bank's exposure
to interest rate changes, due to their generally shorter terms, and producing
higher yields, such loans may entail significant additional credit risks
compared to owner-occupied residential mortgage lending. However, the Bank
believes that the higher yields and shorter terms compensate the Bank for the
increased credit risk associated with such loans.
Commercial real estate lending entails significant additional risks when
compared with one-to-four family residential lending. For example, commercial
loans typically involve larger loan balances to single borrowers or groups of
related borrowers, and the payment experience on such loans typically is
dependent on the successful operation of the project. These risks can be
significantly impacted by the cash flow of the borrowers and supply and demand
conditions in the market for the services or products offered by the borrower.
In periods of decreasing cash flows, the commercial borrower may permit a lapse
in general maintenance of the property causing the value of the underlying
collateral to deteriorate.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk when compared with one-to-four family residential lending. Consumer lending
collections are typically dependent on the borrower's continuing financial
stability, and thus, are more likely to be adversely effected by job loss,
divorce, illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often
-24-
<PAGE>
does not warrant further substantial collection efforts against the borrower,
however a deficiency judgment is normally filed against the borrower.
Loans to One Borrower. National banks are subject to limits on the amount
of credit which they can extend to one borrower. Under current law, loans to one
borrower are limited to an amount equal to 15% of unimpaired capital and surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and surplus if the loan is secured by readily marketable collateral. At
June 30, 1996, the Bank's loans-to-one borrower limit based upon 15% of
unimpaired capital was $1.46 million. At June 30, 1996, the Bank's largest
aggregation of loans to one borrower was approximately $854,000 of loans secured
by equipment leased to franchised fast food vendors. In addition, the lease
contracts are assigned to the Bank and the principals of the borrowing company
have provided personal guarantees. At June 30, 1996, all of these loans were
performing in accordance with their terms. Based upon the receipt $2.50 million
in proceeds from the Offering, the Bank expects its lending limit for any one
borrower to increase to $1.84 million.
Loan Maturities. The following table sets forth the maturity of the Bank's
loans at June 30, 1996. The table does not include prepayments or scheduled
repayments. All loans are shown maturing based upon contractual maturities:
<TABLE>
<CAPTION>
Commercial
Commercial, & Multi-
Industrial & Family 1 - 4 Family
Agricultural Real Estate Real Estate Consumer Other Total
------------ ----------- ------------ -------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual.............. $ 88 $ 706 $ 188 $ 57 $ -- $ 1,039
------ ------- ------- ------- ---- ------
Amounts Due:
Within 3 months........ 5,577 6,589 1,701 927 322 15,116
3 months to 1 year..... 222 98 384 664 20 1,388
------ ------- ------- ------- ---- ------
Total due within 1 year 5,799 6,687 2,085 1,591 342 16,504
------ ------- ------- ------- ---- ------
After 1 year:
1 to 3 years......... 1,889 120 1,272 3,871 26 7,178
3 to 5 years......... 1,390 695 1,955 4,466 39 8,545
5 to 10 years ....... 356 1,563 8,892 2,047 94 12,952
10 to 15 years....... 57 1,208 12,808 20 -- 14,093
Over 15 years........ -- -- 3,135 -- -- 3,135
------ ------- ------- ------- ---- ------
Total due after 1 year 3,692 3,586 28,062 10,404 159 45,903
------ ------- ------- ------- ---- ------
Total............... $ 9,579 $10,979 $30,335 $12,052 $501 63,446
===== ====== ====== ====== === ======
Allowance for loan losses....................................................... 724
-------
$62,722
=======
</TABLE>
-25-
<PAGE>
Loan Solicitation and Processing. The Bank's sources of loan applications
include existing or past customers, call-ins and walk-ins, attorneys and
advertisements in local media.
Loan requests, other than commercial loan requests, are processed by
having the customer complete an application. Information contained in the
application, such as credit references and credit history, is verified, and the
value of any underlying collateral is assessed. If the loan is within the loan
officer's authorized lending authority, the loan can be approved by the officer.
Loans exceeding a particular officer's lending authority are subject to review
and approval by either the officer's loan committee, the board loan committee,
or the full board of directors. Once approved, the customer is notified, and in
the case of residential mortgage loans, a written commitment notice provided.
Arrangements are then made with the borrower to fund the loan.
Commercial loan requests are processed by having the customer submit a
request or written loan proposal, depending on the nature and amount of the loan
requested. Financial information is requested from the applicant and that
information is analyzed and the value of any underlying collateral is assessed.
If the loan is within the loan officers authorized lending authority, the loan
can be approved by the officer. Loans exceeding a particular officer's lending
authority are subject to review and approval by either the officer's loan
committee, the board loan committee, or the full board of directors. Once
approved, the customer is notified, and arrangements are then made with the
borrower to fund the loan.
Loan Commitments. The Bank generally grants commitments to fund fixed rate
single-family mortgage loans for up to 30 days at a specified term and interest
rate. In addition, commitments for revolving lines of credit, both consumer and
commercial are made. These commitments are generally subject to annual review
and renewal based upon past performance and the current credit worthiness of the
borrower. In addition, to the loan and line of credit commitments, the Bank has
various commitments under letters of credit. At June 30, 1996, commitments for
unfunded loans and lines of credit, and letters of credit amounted to $4.8
million and $1.1 million, respectively.
Non-Performing Assets
General. The Bank's general collection policy is to provide a late notice
to commercial and consumer accounts 10 days past due. Late charges are assessed
on consumer loans after 15 days past due. Delinquent accounts are contacted by
phone at 18 days past due, and a collection letter is issued on the 20th day.
Commercial loans are subject to call at 30 days past due. Notice of intent to
foreclose is provided to consumer mortgage customers at 60 days past due. At 90
days, foreclosure proceedings are initiated on real estate securing mortgage
loans. In general, personal property securing loans is subject to repossession
at 50 days past due.
Loans are continually monitored by management and the Board of Directors.
Loans are placed on nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful; but not longer than 90 days past
due for non-real estate loans and 120 days past due for loans secured by real
estate. Interest accrued and unpaid at the time the account is placed on
nonaccrual status is generally charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income based upon management's assessment of the collectibility of the
account. At June 30, 1996, the Bank had $53,000 in loans greater than 90 days
past due and still accruing interest, and $1.04 million in loans on nonaccrual
status.
Of the nonaccrual and nonperforming loans, $831,000 in principal amounts
of loans to a single customer were classified as impaired loans. Under SFAS No.
114, a loan is considered to be impaired when, based on current information, it
is probable the Bank will be unable to collect all principal and
-26-
<PAGE>
interest due in accordance with the contractual terms of the loan agreement.
These impaired loans consist of six commercial and commercial real estate loans
to one borrower. The loans are secured by real estate and vehicles. The borrower
recently sought bankruptcy protection under Chapter 11, and has yet to file a
plan of reorganization. While management believes the Bank is adequately secured
by the underlying collateral, the lack of a plan of reorganization and the
number of unsecured creditors, is likely to cause a delay of time before a plan
of reorganization can be adopted and implemented. As part of management's
ongoing assessment of its loan portfolio, $93,000 of the allowance for loan
losses at June 30, 1996 had been allocated for these loans.
The following table sets forth non-performing loans, other real estate
owned, and repossessions at June 30, 1996 and December 31, 1995 and 1994:
At December 31,
At June 30, ---------------
1996 1995 1994
----- ---- -----
(In Thousands)
Loans past due 90 days or more and accruing $ 53 $ 77 $ 55
Nonaccrual loans ............................. 1,039 194 441
----- ----- -----
Non-performing loans .................... 1,092 271 496
Other real estate owned ...................... 46 -- 340
Repossessions ................................ -- -- 3
----- ----- -----
Total non performing assets ............. $1,138 $ 271 $ 839
===== ===== =====
Non-performing loans to total loans .......... 1.72% 0.42% 0.77%
Allowance for loan losses to non-
performing loans ........................... 66.30 253.51 138.71
Non-performing loans to total assets ......... 1.00 0.27 0.51
Allowance for Loan Losses. The possibility of loan losses is one of the
inherent risks associated with lending. Management realizes, and experience
indicates, that losses may exist at any point in time in the loan portfolio. As
a result, periodic provisions are made to the allowance for loan losses each
year and charged to expense. Such provisions are made to maintain the allowance
at a level sufficient to recognize this inherent risk.
In order to ensure the allowance is maintained at an adequate level, the
Bank employs a comprehensive quarterly internal loan review function. This
review includes an assessment of significant loans and commitments, as well as,
a continuing assessment of classified, problem, or nonperforming loans, and
assessment of the overall quality of the loan portfolio. Based upon this
evaluation, allocations of the current allowance are made, with accounts not
subject to specific review having allocations made based upon fixed and
historical loan loss factors. The unallocated portion of the allowance is then
assessed to ascertain if it is sufficient to withstand any previously
unidentified losses. On a quarterly basis, a report is presented to the Board of
Directors for their review and approval.
In addition to monitoring classified and delinquent loan accounts, the
Bank maintains a separate "watch list" of loan accounts that are subject to
ongoing review and assessment. Loans placed on the watch list are accounts that,
while not exhibiting the deficiencies and characteristics associated with
classified assets, exhibit one or more deficiencies or weaknesses, or a
financial position that has exhibited signs of deterioration, such as a decline
in certain performance ratios, where more frequent assessment
-27-
<PAGE>
of the account status is warranted. At June 30, 1996, accounts on the watch list
totaled $395,000, comprised primarily of consumer real estate mortgage loans.
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
-------------------- -------------------
1996 1995 1995 1994
-------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding ............................... $63,446 $64,994 $64,322 $64,086
====== ====== ====== ======
Average loans outstanding ............................. $63,435 $64,328 $64,701 $61,574
====== ====== ====== ======
Allowance for loan losses at beginning of period....... $ 687 $ 688 $ 688 $ 639
Provision charged to expense .......................... 72 72 143 132
------ ------ ------ ------
Charge-offs:
Commercial and industrial ........................... 2 11 10 14
Commercial, multi-family and 1 - 4 family real estate 43 55 9
Consumer and other .................................. 62 58 140 104
------ ------ ------ ------
Total ............................................ 64 112 205 127
Recoveries:
Commercial, industrial and agricultural ............. 1 1 6 4
Commercial, multi-family and 1 - 4 family real estate 30 30 2
Consumer ............................................ 28 8 25 38
------ ------ ------ ------
Total ............................................ 29 39 61 44
Net charge-offs ..................................... 35 73 144 83
------ ------ ------ ------
Allowance for loan losses at end of period ............ $ 724 $ 687 $ 687 $ 688
====== ====== ====== ======
Allowance for loan losses as a percent of total loans.. 1.14% 1.06% 1.07% 1.07%
Net charge-offs as a percent of average loans ......... 0.06% 0.11% 0.22% 0.13%
</TABLE>
-28-
<PAGE>
The following table provides a breakdown of the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------------- -----------------------------------------
1996 1995 1994
------------------- -------------------- --------------------
% of Loans % of Loans % of Loans
to to to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ------------
(Dollars in Thousands)
Commercial, industrial and
<S> <C> <C> <C> <C> <C> <C>
agricultural ........... $185 15.10% $158 14.01% $185 12.56%
Commercial and multi-
family real estate ..... 156 17.30 87 17.05 107 17.91
1 - 4 family real estate . 26 47.81 33 48.50 36 48.78
Consumer ................. 95 19.00 113 19.45 110 19.92
Other .................... -- 0.79 -- 0.99 -- 0.83
------ --- ------ -----
Unallocated .............. 262 296 250
--- --- ---
Total loans ......... $724 100.00% $687 100.00% $688 100.00%
=== ====== === ====== === ======
</TABLE>
Investment Portfolio
Income from investing activities provides a significant portion of the
Bank's total income. The Bank maintains an investment portfolio of securities
such as U.S. government and agency securities, state and municipal debt
obligations, corporate notes and bonds, and to a lesser extent, mortgage-backed
securities. Management generally maintains an investment portfolio with
relatively short maturities to minimize overall interest rate risk. At June 30,
1996, approximately 93.97% of the total debt securities portfolio had maturities
of five years or less.
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. To meet the credit risk objectives, nongovernment debt instruments must
have a rating of "A" or better to be held in the portfolio.
The Bank's investment policy allows up to 100% of the investment portfolio
to be classified as "available-for-sale." While management has historically held
debt securities to maturity, at June 30, 1996, approximately 59.60% of the
investment portfolio was classified available-for-sale. While this increase in
available for sale securities does not indicate a fundamental change from
management's past investment practices, it does allow the investment portfolio
to be used as a tool to provide additional liquidity beyond that of normal
principal and interest payments, while also allowing for a restructuring of the
investment portfolio should market or other economic factors indicate the need
to do so.
In anticipation of the acquisition of the Knox office of Mellon Bank, the
Bank purchased $4.0 million of investment securities, which were classified as
available for sale, using a short-term borrowing from the FHLB. This borrowing
was repaid on September 20, 1996 from the funds received through the assumption
of the Knox office deposit accounts. See "Recent Developments - Branch
Purchase."
-29-
<PAGE>
The following table sets forth the carrying value of the Bank's investment
portfolio including equity investments in the Federal Reserve Bank and the FHLB
at the dates indicated. At June 30, 1996, the market value of the Bank's
investment portfolio totaled $38.5 million. During the periods indicated, the
Company had no securities of a single issuer that exceeded 10% of stockholders'
equity.
<TABLE>
<CAPTION>
At December 31,
At June 30, -----------------------------------
1996 1995 1994
------------------------ ------------------------ ---------
Available Held To Available Held To Held To
For Sale Maturity For Sale Maturity Maturity
----------- ---------- ----------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury........... $14,484 $ 5,035 $ 9,693 $ 6,078 $11,773
U.S. Government agency . 2,992 1,000 -- 1,000 1,000
Obligations of states and
political subdivisions -- 3,470 -- 3,870 5,194
Corporate............... 5,129 4,358 -- 2,758 3,373
Mortgage-backed securities -- 1,758 -- 2,544 3,679
Federal Reserve and Federal
Home Loan Bank stock.. 440 -- 418 -- 417
------ ------ ------ ------ ------
$23,045 $15,621 $10,111 $16,250 $25,436
====== ====== ====== ====== ======
</TABLE>
-30-
<PAGE>
The following table sets forth certain information regarding the amortized
cost, weighted average yields, and maturities of the Bank's investment
securities portfolio at June 30, 1996, exclusive of investments in equity
securities of the Federal Reserve and Federal Home Loan Banks.
<TABLE>
<CAPTION>
After One Year But After Five Years But
Within One Year Within Five Years Within Ten Years After Ten Years Total
----------------- ------------------ -------------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ ----- ------- -------- ------- ----- ------ -----
(Dollars in Thousands)
Available for Sale
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury......... $2,015 5.72% $12,469 6.16% $ -- -- $ -- -- $14,484 6.10%
U.S. Government Agency -- -- 2,992 6.40 -- -- -- -- 2,992 6.40
Corporate............. -- -- 3,511 6.94 1,618 7.18 -- -- 5,129 7.02
----- ------ ---- ----- ---- ---- -----
Total $2,015 5.72% $18,972 6.34% $ 1,618 7.18% $ -- --% $22,605 6.35%
===== ==== ====== ==== ===== ==== ====
Held to Maturity
U.S. Treasury......... $4,026 5.13% $1,009 5.99% $ -- --% $ -- --% $ 5,035 5.30%
U.S. Government Agency 1,000 4.88 -- -- -- -- -- -- 1,000 4.88
Obligations of states and
political subdivisions 1,055 3.85 2,415 3.79 -- -- -- -- 3,470 3.81
Corporate............. 1,313 6.36 3,045 6.25 -- -- -- -- 4,358 6.28
Mortgage-backed securities -- -- 1,072 5.70 -- -- 686 7.60 1,758 6.45
----- ----- ------ --- -----
Total $7,394 5.13% $7,541 5.35% $ -- --% $ 686 7.60% $15,621 5.35%
===== ==== ===== ==== ====== ==== === ==== ====== ====
</TABLE>
-31-
<PAGE>
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 and through its primary
correspondent bank. In addition, the Bank can obtain advances from the Federal
Reserve Bank discount window.
Deposits. The Bank offers a wide variety of retail deposit account
products to both consumer and commercial deposit customers. Time deposits,
consisting principally of retail, fixed-rate certificates of deposit comprised
40.69% of the deposit portfolio at June 30, 1996. Core deposits considered to be
noninterest bearing and interest bearing demand deposit accounts, savings
deposits, and money market accounts accounted for 59.31% of the deposit
portfolio at June 30, 1996.
The Bank intends to continue to emphasize retail deposit accounts as its
primary source of funds. Deposit products are promoted in periodic newspaper and
radio advertisements, along with notices provided in customer account
statements. The Bank does not broker certificates of deposits and held no such
deposits at June 30, 1996. The Bank's market strategy is based on its reputation
as a community bank that provides quality products and personal customer
service.
The Bank pays interest rates on its interest bearing deposit products that
are competitive with rates offered by other financial institutions in its market
area. Interest rates on deposits are reviewed weekly by management considering a
number of factors including (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
-32-
<PAGE>
The following table sets forth the types of deposits at the periods
indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
Average Average Percent Average Average Percent Average Average Percent
Balance Rate of Total Balance Rate of Total Balance Rate of Total
------- ------- -------- ------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand... $13,488 --% 14.89% $13,080 --% 14.84% $12,471 --% 14.22%
Interest bearing demand....... 11,582 2.10 12.79 12,217 2.23 13.86 12,513 2.21 14.26
Savings....................... 13,201 2.79 14.58 12,600 3.06 14.29 12,968 3.03 14.78
Money market.................. 15,893 3.22 17.55 16,793 3.30 19.05 19,533 3.08 22.27
Certificates of deposit....... 36,403 5.27 40.19 33,473 5.27 37.97 30,236 4.28 34.47
------ ------ ------ ------ ------ -----
$90,567 3.36% 100.00% $88,163 3.38% 100.00% $87,721 2.93% 100.00%
====== ==== ====== ====== ==== ====== ====== ==== ======
</TABLE>
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<PAGE>
Jumbo Certificates of Deposit. Jumbo certificates of deposit are accounts
of $100,000 or more. These accounts totaled $4.6 million at June 30, 1996 and
consisted principally of deposits by local governmental bodies, with the rates
being negotiated or bid by the Bank. The following table sets forth the amount
and maturity of jumbo certificates of deposit at June 30, 1996.
Certificates
Maturity Period of Deposit
- ------------------------- --------------
(In Thousands)
Less than 90 Days....... $ 718
3 Months to 1 Year...... 2,139
Greater than 1 Year..... 1,748
-----
Total.............. $4,605
=====
Short-Term Borrowings. While deposits are the primary funding source for
the lending and investment activities of the Bank, other funding sources are
available should the need arise or favorable market conditions exist. The Bank
has access to funds through credit facilities made available by the FHLB and its
primary correspondent bank, as well as access to the Federal Reserve Bank
discount window. Historically, the Bank has rarely had occasion to borrow funds,
however as previously discussed (see "- Investment Portfolio"), the Bank
obtained a short-term borrowing of $4.0 million from the FHLB to purchase
investment securities in anticipation of the completion of the acquisition of
the Knox branch office of Mellon Bank. In addition, at June 30, 1996, the Bank
had purchased federal funds totaling $1.0 million, which was subsequently
repaid.
The following table sets forth information pertaining to short-term
borrowings for the six months ended June 30, 1996. No such borrowings were
outstanding for the years ended December 31, 1995 and 1994.
Six Months Ended
June 30, 1996
--------------------
(Dollars in Thousands)
Short-term borrowings:
Average balance outstanding during the period $ 489
Maximum amount outstanding at any month-end
during the period....................... $5,000
Weighted average interest rate............ 5.52%
Total short-term borrowings at period end. $5,000
Other Borrowings. The Bank leases certain of its data processing equipment
under a capital lease. The term of the lease is 60 months expiring June 1999.
The obligation remaining under the terms of this agreement totaled $124,000 at
June 30, 1996.
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<PAGE>
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Bank. As of June 30,
1996, the Bank had no subsidiaries.
Personnel
At June 30, 1996, the Bank had 69 full time equivalent employees. None of
its employees are represented by a collective bargaining unit. The Bank believes
its relationship with its employees to be satisfactory.
Competition
The Bank competes with regional and other community commercial banks,
thrift institutions, credit unions, and non financial institution entities such
as mutual funds and securities brokers, for deposit customers, in its primary
market area of Venango, Clarion, Butler and northern Armstrong Counties. In
addition to competing financial institutions, the Bank also competes with
mortgage brokers, mortgage banking companies and consumer finance companies for
loan customers.
The Bank competes for deposit funds by offering a variety of deposit
products, quality personal service and competitive interest rates. In addition,
the Bank offers a number of other services including but not limited to, safe
deposit boxes, night depositories, automated teller machines, wire transfers and
direct deposit.
The Bank competes for loans by charging competitive interest rates and
nominal fees, along with providing efficient and comprehensive service to loan
customers.
Properties
The Company owns no real property but utilizes the main office of the
Bank. The Company's and the Bank's executive offices are located at 612 Main
Street, Emlenton, Pennsylvania. The Company pays no rent or other form of
consideration for the use of this facility. The Bank has seven offices located
in Venango, Clarion, and Butler counties, Pennsylvania. The Bank's total
investment in office property and equipment was $3.1 million with a net book
value of $2.1 at June 30, 1996.
<TABLE>
<CAPTION>
Main Office Eau Claire Office Clarion Office Knox Main Street Office
- ----------- ----------------- -------------- -----------------------
<C> <C> <C> <C>
612 Main Street 207 South Washington Street Sixth and Wood Streets Main and State Streets
Emlenton, Pennsylvania Eau Claire, Pennsylvania Clarion, Pennsylvania Knox, Pennsylvania
Venango County Butler County Clarion County Clarion County
East Brady Office Bon Aire Office Knox 338 Office
- ----------------- --------------- ---------------
Broad and Brady Street 1101 North Main Street Rt. 338 South
East Brady, Pennsylvania Butler, Pennsylvania Knox, Pennsylvania
Clarion County Butler County Clarion County
</TABLE>
All offices are owned by the Bank, except for the Bon Aire and Knox 338
offices which are leased. The Bon Aire office is a unit in the Bon Aire Plaza
operated under a 5 year lease with an option to renew. The Knox 338 office,
which commenced operations August 12, 1996, is located in a
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<PAGE>
supermarket, and is operated under a 5 year lease with an option to renew. The
Bank also maintains a remote ATM facility located in a supermarket in East
Brady.
The Bank also owns two lots located on Main Street in Emlenton,
Pennsylvania. The lots are currently used for employee parking.
Legal Proceedings
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time, is party to litigation which arises in
the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of the Bank. In the opinion of management the resolution of any
such issues would not have a material adverse impact on the financial position,
results of operation, or liquidity of the Bank or the Company.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
provisions of certain laws which relate to the regulation of the Company and the
Bank. The description does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Regulation - The Company
The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company is required to file quarterly reports and annual reports with the
Federal Reserve Board and such additional information as the Federal Reserve
Board may require pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board 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 Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease, or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. Because the Company has less than $150 million in assets on a
consolidated basis, the capital levels of the Bank are deemed by the Federal
Reserve Board to be the capital levels of the Company. For additional
information on the capital levels of the Bank, see "- Regulation - The Bank -
Capital Standards" and "Management's Discussion and Analysis - Liquidity and
Capital Resources - Capital Resources."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially
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all of the assets of any bank or bank holding company. Prior approval of the
Federal Reserve Board is also required for the merger or consolidation of the
Company and another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any activities, or acquire
shares of companies engaged in activities that are deemed by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. The validity of the source of strength doctrine
has been and is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
Regulation - The Bank
General. The Bank, as a national banking association, is subject to
primary supervision, examination, and regulation by the OCC. 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 Bank's operations are unsatisfactory or that
the Bank or its management 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 growth of the Bank, to assess civil monetary penalties,
and to remove officers and directors. The FDIC has similar enforcement
authority, in addition to its authority to terminate a bank's deposit insurance,
in the absence of action by the OCC and upon a finding that a bank is in an
unsafe or unsound condition, is engaging in unsafe or unsound activities, or
that its conduct poses a risk to the deposit insurance fund or may prejudice the
interest of its depositors. The Bank is not subject to any such actions by the
OCC or the FDIC.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a quarterly statutory
assessment. See "- Premiums for Deposit Insurance." Various other requirements
and restrictions under the laws of the United States affect the operations of
the Bank. Federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices, capital requirements, and disclosure obligations to
depositors and borrowers. Further, the Bank is required to maintain certain
levels of capital. See "- Capital Standards."
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Restrictions on Transfers of Funds to the Company by the Bank. The Company
is a legal entity separate and distinct from the Bank. The prior approval of the
OCC is required if the total of all dividends declared by the Bank in any
calendar year exceeds the Bank's net profits (as defined) for that year combined
with its retained net profits (as defined) for the preceding two years, less any
transfers to surplus.
The OCC also has authority to prohibit the Bank from engaging in
activities that, in the OCC's opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank may pay to the
Company. See "- Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms" and "- Capital Standards" for a discussion of these additional
restrictions on capital distributions.
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, the Company or other 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 the Company or other affiliates. Such
restrictions prevent the Company and such other 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 the
Company or to or in any other affiliate is limited to 10% 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% of the Bank's capital and
surplus (as defined by federal regulations). 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."
Capital Standards. The Federal Reserve Board and the OCC 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, such as letters of credit and recourse arrangements, 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 certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1
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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.
Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Under FDIC regulations, an
institution is generally considered "well capitalized" if it has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, and a Tier 1 capital (leverage) ratio of at least 5%. Federal law
generally requires full-scope on-site annual examinations of all insured
depository institutions by the appropriate federal bank regulatory agency
although the examination may occur at longer intervals for small
well-capitalized or state chartered banks. At June 30, 1996, the Bank was well
capitalized. See "Management's Discussion and Analysis Liquidity and Capital
Resources - Capital Resources."
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. See Note 8 of the
Notes to Consolidated Financial Statements. The federal banking agencies issued
final rules, effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institution's regulatory capital. The
standard has been in effect on an interim basis since March 1993.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal law
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. In September 1992, the federal banking agencies issued uniform
final regulations implementing the prompt corrective action provisions of
federal law.
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 an institution as critically undercapitalized unless its
capital ratio actually warrants such treatment.
In addition to restrictions and sanctions imposed 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. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
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injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted.
Safety and Soundness Standards. In July 1995, the federal banking agencies
adopted final guidelines establishing standards for safety and soundness. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
Premiums for Deposit Insurance. Federal law has established several
mechanisms to increase funds to protect deposits insured by the BIF as
administered by the FDIC. The FDIC is authorized to borrow up to $30 billion
from the United States Treasury; up to 90% of the fair market value of assets of
institutions acquired by the FDIC as receiver from the Federal Financing Bank;
and from depository institutions that are members of BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. The result of these provisions is that the assessment rate
on deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, effective
January 1, 1994, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of any such loss, and the revenue needs of
the deposit insurance fund. On August 8, 1995, the FDIC issued final regulations
adopting an assessment rate schedule for BIF members of 4 to 31 basis points
effective on June 1, 1995. On November 14, 1995, the FDIC further reduced
deposit insurance premiums to a range of 0 to 27 basis points effective for the
semi-annual period beginning January 1, 1996 with a minimum assessment of
$2,000.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the Bank will pay, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Member of the Savings Association Insurance
Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 6.4 basis points. Based on total deposits as of
June 30, 1996 (includes the assumption of $14.1 million of deposits in
connection with the Mellon branch acquisition), had the Act been in effect, the
Bank's annual deposit insurance premium would have been approximately $14,000.
Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds
will be equal for members of the BIF and the SAIF. The Act also provides for the
merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
Interstate Banking and Branching. In September 1994, the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
became law. Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed may
obtain approval under the BHCA to acquire an existing bank located in another
state without regard to state law. A bank holding company would not be permitted
to make such an acquisition if, upon
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consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may increase or
decrease the percentage of total deposits that may be held in that state y any
one bank or bank holding company if application of such percentage does not
discriminate against out-of-state banks. An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of time
that may be prescribed by state law except that a state may not impose more than
a five year existence requirement.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by OCC regulations, a bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OCC, in
connection with its examination of a bank, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The OCC evaluates
an institution's CRA performance utilizing a four tiered descriptive rating
system. The Bank received the rating of "satisfactory" as a result of its last
evaluation in March 6, 1996.
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's articles of
incorporation and bylaws provide for staggered terms for the Board of Directors.
The Board of Directors has been divided into three classes so that, after their
initial terms, approximately one-third of the directors are elected to a
three-year term at each annual shareholders meeting. Each director of the
Company also serves as a director of the Bank.
<TABLE>
<CAPTION>
Position with Director Current Term
Name of Individual Age (1) the Company Since(2) Expires
- ------------------ ------- ------------- -------- --------
<S> <C> <C> <C> <C>
Ronald L. Ashbaugh(3) 60 President and 1971 1997
Chairman of the
Board
Dr. Clinton R. Coulter 87 Director 1962 1997
David L. Cox(3) 45 Vice President 1991 1998
and Director
Bernadette H. Crooks 73 Director 1985 1999
George W. Freeman 65 Director 1964 1997
Rodney C. Heeter 59 Director 1988 1998
Robert L. Hunter 54 Director 1974 1999
J. Michael King 48 Director 1988 1998
John B. Mason 48 Director 1985 1999
Elizabeth C. Smith 65 Director 1995 1997
John J. Boczar 37 Treasurer n/a n/a
Ronald L. Larimore 50 Secretary n/a n/a
</TABLE>
- ------------------------------
(1) As of June 30, 1996.
(2) Refers to the year the individual first became a director of the Company or
the Bank.
(3) Effective December 31, 1996, Mr. Ashbaugh will step down from his position
as President. He will, however, remain a member of the Board. At that time,
it is anticipated that Mr. Cox will succeed Mr. Ashbaugh as President of
both the Company and the Bank.
Biographical Information
The business experience of each director and executive officer of the
Company is set forth below. All directors and executive officers have held their
present positions for a minimum of five years unless otherwise stated.
Ronald L. Ashbaugh has been President of the Bank since 1972 and a director
of the Bank since 1971. Mr. Ashbaugh became President and a director of the
Company upon its formation in 1989.
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<PAGE>
Dr. Clinton R. Coulter has been a director of the Bank since 1962 and of
the Company since its formation in 1989. Dr. Coulter is retired from private
practice as a general practitioner of medicine.
David L. Cox has been a Senior Vice President of the Bank since 1989 and a
director of the Bank since 1991. Mr. Cox also serves as Vice President of the
Company and has been a director of the Company since 1991.
Bernadette H. Crooks has been a director of the Bank since 1985 and of the
Company since its formation in 1989. Ms. Crooks is a consultant for Crooks
Clothing, Inc. located in Clarion, Pennsylvania and was employed with the Tree
House Department (ladies department) of Crooks Clothing as a manager and buyer
for over 25 years.
George W. Freeman has been a director of the Bank since 1964 and of the
Company since its formation in 1989. Mr. Freeman is retired from Quaker State
Corporation, Oil City, Pennsylvania and currently owns and operates a tree farm
in Emlenton, Pennsylvania.
Rodney C. Heeter has been a director of the Bank since 1988 and of the
Company since its formation in 1989. Mr. Heeter is the manager of Heeter Lumber
Co., Inc., a retail building and ready mix concrete supplier located in Sligo,
Pennsylvania.
Robert L. Hunter has been a director of the Bank since 1974 and of the
Company since its formation in 1989. Mr. Hunter is the President of Hunter
Leasing, Inc., a truck leasing company located in Butler, Pennsylvania. Mr.
Hunter is also the secretary and treasurer of Hunter Truck Sales and Service,
Inc., Eau Claire, Pennsylvania, and Hunter Truck Center, Inc., Butler,
Pennsylvania, as well as a partner in Hunter Realty, a real estate management
partnership, located in Eau Claire, Pennsylvania.
J. Michael King has been a director of the Bank since 1988 and of the
Company since its formation in 1989. Mr. King is a partner in the law firm of
Lynn, King and Schreffler located in Emlenton, Pennsylvania.
John B. Mason has been a director of the Bank since 1985 and of the Company
since its formation in 1989. Mr. Mason has been an insurance agent with the
agency of H.B. Beels & Sons, Inc. located in Knox, Pennsylvania since 1970 and
also currently serves as the agency's secretary and treasurer.
Elizabeth C. Smith has been a director of the Bank and the Company since
1995. Ms. Smith is the owner and assistant to the innkeeper for the Inn at
Oakmont located in Oakmont, Pennsylvania.
John J. Boczar has served as the Vice President and Chief Financial Officer
of the Bank and as Treasurer of the Company since May 1996. Prior to that time,
Mr. Boczar was an accountant with the accounting firm of S.R. Snodgrass A.C.,
serving most recently as a manager.
Ronald L. Larimore has served as Vice President and Cashier of the Bank
since 1985 and as Secretary of the Company since 1989.
Director and Executive Officer Compensation
Director Compensation. Directors are not compensated for attendance at
board of director meetings of the Company. During the fiscal year 1995, each
member of the Board of Directors of the
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Bank received a fee of $400 per month. Additionally, each member of a committee
of the Board of Directors of the Company received $50 per committee meetings.
Effective, May 1996, committee and special meeting fees were raised to $100 per
meeting. For the year ended December 31, 1995, total fees paid to directors were
$51,000.
Executive Officer Compensation. The Company has no full time employees,
but relies on the employees of the Bank for the limited services required by the
Company. All compensation paid to officers and employees is paid by the Bank.
The following table sets forth the cash and non-cash compensation awarded
to or earned by the Chief Executive Officer of the Company. No executive officer
of the Company had a salary and bonus during the years ended December 31, 1995,
1994, and 1993 that exceeded $100,000 for services rendered in all capacities to
the Company.
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation(1)
- ------------------ ------ ------ ----- ---------------
Ronald L. Ashbaugh 1995 $85,813 $10,243 $4,800
President and Chairman of 1994 $81,375 $ 9,732 $4,800
the Board 1993 $78,375 $ 9,597 $4,800
- ------------------------
(1) Does not include the value of certain other benefits, which do not exceed
10% of the total salary --- and bonus of the individual.
Other Benefits
Pension Plan. The Bank sponsors a tax-qualified defined benefit pension
plan (the "Pension Plan"). All full-time employees of the Bank are eligible to
participate if the employee has completed five years of service or reached the
age of 55 unless (i) the employee is covered under another plan to which the
Bank contributes; or (ii) the employee is covered under a collective bargaining
agreement with the Bank that does not provide for coverage under the Pension
Plan. The Pension Plan is intended to comply with ERISA. For the Pension Plan
year ended December 31, 1995, the highest permissible annual benefit under the
Internal Revenue Code of 1986, as amended (the "Code") is $120,000. Benefits
under the Pension Plan are not subject to offset for Social Security benefits.
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age (age 65). The monthly benefits payable under
the Pension Plan are equal to 1.1% of the first $675 of average compensation
plus 1.5% of average compensation in excess of $675, for each year of service.
If a participant elects early retirement, the participant receives a reduced
monthly benefit. If a participant elects late retirement, the participant
receives an increased monthly benefit. Benefits are paid for the life of the
participant following retirement. The Pension Plan also provides for guaranteed
payments in the event of death, up to 60 monthly payments or a lump sum payment.
At December 31, 1995, Mr. Ashbaugh had 37 years of credited service under the
Pension Plan.
Total Pension Plan expense for the years ended December 31, 1995 and 1994
amounted to $9,000 and $13,000, respectively.
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Certain Relationships and Related Transactions
The Bank had no "interlocking" relationships existing on or after January
1, 1995 in which (i) any executive officer is a member of the Board of
Directors/Trustees of another entity, one of whose executive officers is a
member of the Bank's Board of Directors, or where (ii) any executive officer is
a member of the compensation committee of another entity, one of whose executive
officers is a member of the Bank's Board of Directors.
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers and directors. Such loans (a) have
been made in the ordinary course of business, (b) were made on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Bank's other
customers, and (c) do not involve more than the normal risk of collectibility or
present other unfavorable features. All loans by the Bank to its directors and
executive officers are subject to regulations restricting loans and other
transactions with affiliated persons of the Bank. Loans to officers and
directors of the Bank and their affiliates, amounted to approximately $1,359,000
or 14.80% of the Bank's equity at June 30, 1996. Assuming the sale of 200,800
shares, loans to officers and directors of the Bank at that date would have
totalled approximately 11.66% of pro forma stockholders' equity of the Company.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 20, 1996, certain information
as to each person who was known to be the beneficial owner of more than 5% of
the Company's Common Stock, followed by certain information as to the beneficial
ownership of the directors individually and by all directors and executive
officers of the Company as a group.
Amount and Nature
Name of Individual Position with of Beneficial Percent
or Identity of Group the Corporation Ownership(1)(2) of Class
-------------------- --------------- --------------- --------
Barbara C. McElhattan
P.O. Box 515
Emlenton, PA 16373 (3) -- 63,140 7.90%
Mary E. Dascombe
6906 Buckhead Drive
Raleigh, NC 27609 (4) -- 83,712 10.47%
F.N.B. Corporation
Hermitage Square
Hermitage, PA 16148 -- 90,160 11.28%
Ronald L. Ashbaugh (5) President and Chairman 10,000 1.25%
of the Board
Dr. Clinton R. Coulter (5) Director 17,136 2.14%
David L. Cox (5) Vice President 7,600 -.-- %(6)
and Director
Bernadette H. Crooks (7) Director 77,480 9.69%
George W. Freeman (8) Director 75,200 9.41%
Rodney C. Heeter (9) Director 4,000 -.-- %(6)
Robert L. Hunter (5) Director 4,800 -.-- %(6)
J. Michael King (5) Director 4,000 -.-- %(6)
John B. Mason (5) Director 2,260 -.-- %(6)
Elizabeth C. Smith (5) Director 26,660 3.34%
All Executive Officers and
Directors as a Group (10
Directors, four Executive
Officers, 12 persons in
total) 233,572 29.23%
- ------------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Securities and Exchange Commission
(the "Commission") and may include securities owned by or for the
individual's spouse and minor children and any other relative who has the
same home, as well as securities to which the individual has or shares
voting or investment power or has the
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right to acquire beneficial ownership within 60 days of August 20, 1996.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Information furnished by the directors, the Company, and individual owners.
(3) Of the 63,140 shares beneficially owned by Mrs. McElhattan, 31,980 shares
are owned individually, 26,640 shares are owned jointly with her spouse,
and 4,520 shares are owned individually by her spouse.
(4) Of the 83,712 shares beneficially owned by Mrs. Dascombe, 61,320 shares are
owned individually and 22,392 shares are owned individually by her spouse.
(5) All shares are owned individually.
(6) Less than 1.00%.
(7) Of the 77,480 shares beneficially owned by Mrs. Crooks, 71,880 shares are
owned individually and 5,600 are owned individually by her spouse.
(8) Of the 75,200 shares beneficially owned by Mr. Freeman, 73,200 shares are
owned individually and 2,000 shares are owned individually by his spouse.
(9) Of the 4,000 shares beneficially owned by Mr. Heeter, 2,000 shares are
owned individually and 2,000 shares are owned individually by his spouse.
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of 12,000,000 shares of
Common Stock, par value $1.25 per share and 3,000,000 shares of preferred stock,
par value $1.00 per share (the "Preferred Stock"). As of August 20, 1996, there
were issued and outstanding 799,200 shares of Common Stock, which were held by
approximately 226 shareholders of record. The shares of Common Stock to be
issued hereby will be fully paid and non-assessable. Upon completion of the
Offering, the Company anticipates that the Common Stock will be quoted on the
OTC Electronic Bulletin Board. The Bank acts as transfer agent for the Common
Stock.
Common Stock
The holders of Common Stock are entitled to receive dividends when and as
declared by the Board out of funds legally available therefor. Upon dissolution
of the Company, the holders of Common Stock are entitled to share pro rata in
the Company's net assets after payment or provision for payment of all debts and
liabilities of the Company, and after provisions for any class of Preferred
Stock or other senior security which may be issued by the Company.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and may not cumulate their votes
for the election of directors. Subject to the voting rights of the holders of
Preferred Stock, if any, the exclusive voting power for all purposes is vested
in the holders of the Common Stock. Each share of Common Stock is entitled to
participate on a pro rata basis in dividends and other distributions. The
holders of Common Stock do not have preemptive rights to subscribe for
additional shares that may be issued by, and no share is entitled in any manner
to any preference over any other share.
Preferred Stock
The Company has the authority, exercisable by its Board of Directors and
without shareholder approval, to issue, in one or more series, shares of
Preferred Stock from time to time and in such series and with such preferences,
limitations, and relative rights as may be determined by the Board of Directors
for such purposes and for such consideration as it may deem advisable.
Accordingly, the Board of
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<PAGE>
Directors, without shareholder approval, may authorize the issuance of one or
more series of Preferred Stock with the same voting power as the holders of
Common Stock.
The creation and issuance of any series of Preferred Stock and the
relative rights, designations, and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, then existing market conditions and other factors that, in the
judgment of the Board of Directors, might warrant the issuance of Preferred
Stock. As of the date of this Prospectus, the Company has no arrangements,
undertakings, or plans with respect to the issuance of Preferred Stock.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
The Company's Articles of Incorporation and Bylaws and the Pennsylvania
Business Corporation Law (the "PBCL") contain certain provisions designed to
enhance the ability of the Board of Directors to deal with attempts to acquire
control of the Company. These provisions, and the ability of the Board of
Directors to issue shares of Preferred Stock and to set the voting rights,
preferences, and other terms thereof, may be deemed to have an anti-takeover
effect and may discourage takeover attempts that have not been approved by the
Board of Directors (including takeovers which certain shareholders may deem to
be in their best interest). These provisions also could discourage or make more
difficult a merger, tender offer, or proxy contest, even though such transaction
may be favorable to the interests of shareholders, and could potentially
adversely affect the market price of the Common Stock.
The following briefly summarizes protective provisions contained in the
Articles and Bylaws and provided by the PBCL. This summary is necessarily
general and is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the Articles and Bylaws and the statutory provisions contained in the PBCL.
Articles and Bylaws
Staggered Terms for Members of the Board of Directors. The Bylaws provide
that the Board of Directors be divided into three classes as nearly equal in
number as possible, with one class to be elected annually for a term of three
years and until their successors are elected and qualified. Vacancies occurring
in the Board of Directors, including vacancies created by an increase in the
number of directors, may be filed by the Board of Directors, and any directors
so chosen shall hold office until the expiration of the term of office of the
class of directors to which such person was appointed.
Removal of Directors. Pursuant to the Bylaws, the Board of Directors may
declare vacant the office of a director who has been judicially declared of
unsound mind or who has be convicted of an offense punishable by imprisonment
for a term of more than one year. In addition, upon application of any
shareholder or director, a court of competent jurisdiction may remove from
office a director for certain specified actions and may bar the director so
removed from further serving as a director.
Mergers, Consolidations, and Sales of Assets. The Articles of
Incorporation provide that any merger, consolidation, or action that would
result in the sale or other disposition of all or substantially all of the
assets of the Company must be approved by at least 80% of the outstanding shares
of Common Stock of the Company. The members of the Board of Directors and the
executive officers of the Corporation beneficially owned 29.23% of the
outstanding shares of Common Stock as of the August 20, 1996. This provision,
when viewed in combination with the Common Stock beneficially owned by directors
and executive officers and additional purchases by directors and executive
officers in the
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<PAGE>
Offering, may discourage potential proxy contests and other potential takeover
attempts, particularly those that have not been negotiated with the Board of
Directors, and thus, generally may serve to perpetuate current management.
Other Provisions. Other provisions in the Articles of Incorporation and
Bylaws effect the rights of shareholders including: (1) a provision in the
Articles permitting the Board to review considerations other than shareholder
interests in evaluating a tender offer (Article 10), (2) a provision in the
Bylaws stating that only the Board of Directors or the president can the call a
special meeting of shareholders (Art. 2, Sec. 2.3), (3) a provision in the
Bylaws requiring 60 days advance notice for shareholder nominations of directors
(Art. 10, Sec. 10.1), and (4) provisions in the Bylaws limiting personal
liability of directors (Art. 12, Sec. 12.5) and providing indemnification to
directors, officers, and employees of the Company (Art. 24) under certain
circumstances, including actions on behalf of the Company.
Amendment of Governing Instruments. Pennsylvania law provides that no
amendment to the Articles of Incorporation may be effected unless it is first
proposed by the Board of Directors of the Company and thereafter approved by a
majority of the votes cast by the holders of the outstanding Common Stock. In
addition, certain provisions of the Articles of Incorporation relating to
mergers, consolidations, liquidation, dissolution, or sale of all assets require
the approval of 80% of the outstanding shareholders in order to amend such
provisions. The Bylaws of the Company provide that the Bylaws may be altered,
amended, or repealed by the affirmative vote of the holders of two-thirds of the
outstanding shares of Common Stock of the Company or by the majority vote of the
members of the Board of Directors.
PLAN OF DISTRIBUTION
General
Subject to the terms and conditions of the agency agreement between the
Company and Hopper Soliday (the "Agency Agreement"), Hopper Soliday has agreed
to assist the Company, on a best efforts basis, to market the Common Stock in
the Offering. The Agency Agreement provides that the obligations of Hopper
Soliday thereunder are subject to approval of certain legal matters by counsel
and to various other conditions. The nature of Hopper Soliday's obligation is
such that it is not committed to purchase and pay for any of the shares of
Common Stock.
Hopper Soliday is a broker-dealer registered with the NASD. Specifically,
Hopper Soliday will assist in the Offering in the following manner: (i) training
and educating the Company's and the Bank's employees regarding the mechanics and
regulatory requirements of the offering process; (ii) conducting information
meetings for potential investors, if necessary; (iii) managing the sales efforts
in the Offering; and (iv) keeping records of all stock orders.
Materials for the Offering will be initially distributed to potential
investors by mail, with additional copies available at the Bank's offices.
During the Offering, officers of the Company may be available to answer
questions, however, such officers will not be permitted to make statements about
the Bank or the Company unless such information is also set forth in this
Prospectus, and they will not be authorized to render investment advice. All
subscribers for the shares to be offered will be instructed to send payment
directly to the Bank.
A minimum purchase of 100 shares (minimum investment of $1,350.00) is
required. No person will be allowed to purchase more than 10,000 shares. The
Offering will terminate at _____ p.m. local time, Emlenton, Pennsylvania on
__________, 1996, unless extended for up to an additional 30 days
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<PAGE>
(to _______________, 1996). The Company may cancel the Offering at any time, and
orders for Common Stock which have been submitted prior thereto are subject to
cancellation under such circumstances.
Over-Allotment Reserve
The Company may, in its sole discretion, increase the number of shares
offered hereby by 30,000 shares to 230,800 shares in order to permit the Company
to satisfy unfilled orders in the Offering. However, no assurance can be given
that the Company will utilize the Over-allotment Reserve in whole or in part to
satisfy unfilled orders in the Offering.
Marketing Arrangements
The Company has engaged Hopper Soliday as a financial and marketing
advisor in connection with the Offering and Hopper Soliday has agreed to act as
an underwriter on a best efforts basis to solicit purchase orders for shares of
Common Stock in the Offering. Hopper Soliday is not obligated to purchase any
shares. The Company, with the assistance of Hopper Soliday, proposes to offer
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus. Hopper Soliday has received an
advisory and consulting fee of $20,000. The Company shall also pay fees equal
to: (1) 2.00% of the gross offering proceeds of all shares of Common Stock sold
to existing shareholders, except for orders from directors, officers, employees,
and immediate family members of such persons; (2) 3.00% of the gross offering
proceeds of all shares of Common Stock sold to the public, except for orders
from directors, officers, employees, and immediate family members of such
persons; and (3) 7.00% of the gross offering proceeds of sales made through
selected broker/dealers, including Hopper Soliday ("Selling Group"), of which
2.00% of such aggregate amount will be paid to Hopper Soliday as a management
fee and 5.00% of such aggregate amount will be paid the particular Selling Group
member as a marketing fee.
The Company will pay for all of its expenses in connection with the
Offering, including legal, accounting, printing, and advertising expenses. In
addition, Hopper Soliday and its counsel will be reimbursed for reasonable
out-of-pocket expenses not to exceed $7,500 and legal fees of up to $15,000.
The Company has agreed to indemnify Hopper Soliday, to the extent allowed
by law, for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act.
Determination of Offering Price
The Offering Price has been determined by the Company with the assistance
of Hopper Soliday based on certain factors including recent prices of trades for
the Common Stock, an evaluation of the financial condition and performance of
the Company, and comparisons of the relationships between market prices, book
values, and earnings per share of other financial institutions of a similar size
and asset quality. Such decision will not be solely based upon an actual trading
market for the Common Stock; accordingly, there can be no assurance that the
Common Stock may be resold at or above the Offering Price.
Procedure for Subscribing for Common Stock in the Offering
Use of Order Forms. Orders for the Common Stock will only be accepted upon
completion of an Order Form. Any person receiving an Order Form who desires to
subscribe for shares of Common
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<PAGE>
Stock must do so prior to the Expiration Date by delivering (by mail or in
person) to the Bank a properly executed and completed Order Form together with
full payment of the Purchase Price for all shares for which subscription is
made. The Company shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Offering at any time prior to the Expiration Date. Once tendered, orders cannot
be revoked without the consent of the Company.
The method of delivery of Order Forms and payment of the aggregate
purchase price to the Company will be at the election and risk of Offering
participants, but if sent by mail, the Company recommends that such Order Forms
and payments be sent by registered mail, properly insured, with return receipt
requested and that a sufficient number of days be allowed to ensure delivery to
the Company and clearance of payment prior to the Expiration Date. Because
uncertified checks may take five business days to clear, investors are strongly
urged to pay, or arrange for payment, by means of certified or cashier's check,
money order, or wire transfer of funds.
In the event an Order Form (i) is not received or is received after the
Expiration Date; (ii) is defectively completed or executed; or (iii) is not
accompanied by the full required payment for the shares subscribed for or, in
the case of an institutional investor, by delivering irrevocable orders together
with a legally binding commitment to pay the full purchase price prior to 48
hours before the Expiration Date, the Company may, but will not be required to,
waive any irregularity on any Order Form or require the submission of corrected
Order Forms or the remittance of full payment for subscribed shares by such date
as the Company may otherwise specify. The waiver of an irregularity on an Order
Form in no way obligates the Company to waive any other irregularity on any
other Order Form. Waivers will be considered on a case by case basis. The
Company reserves the right in its sole discretion to accept or reject orders
received on photocopies or facsimile Order Forms, or whose payment is to be made
by wire transfer or payment from private third parties. The interpretation by
the Company of the acceptability of the Order Forms will be final.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to such date or hand delivered any later
than two days prior to such date. Execution of the Order Form will confirm
receipt or delivery in accordance with Rule 15c2-8. Order Forms will only be
distributed with a Prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares, computed on the basis of the Purchase Price, will be required
to accompany all properly completed Order Forms, on or prior to the expiration
date specified on the Order Form unless such date is extended by the Company.
Payment for shares of Common Stock may be made (i) in cash, if delivered in
person, (ii) by check or money order payable to the Company, or (iii) by wire
transfer of funds to the escrow account maintained by the Company for such
purposes at ________, Account No. ______; ABA No. ______. For orders or
subscriptions of $25,000 or more, payments must be made by wire transfer,
certified check, cashier's check, or money order. An executed Order Form, once
received by the Company, may not be modified, amended, or rescinded without the
consent of the Company. All funds received in payment of the purchase price will
be held by the Company in a non-interest bearing escrow account at the Bank.
Subscriptions for Common Stock which are received by the Company from
participants in the Offering may not be revoked without the consent of the
Company.
Investors who elect to purchase shares of Common Stock from a member of
the Selling Group are advised that any broker-dealer who participates in the
Selling Group will be required either (i) upon
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<PAGE>
receipt of an executed Order Form or direction to execute an Order Form on
behalf of an investor, to forward the aggregate purchase price to the Company on
or before twelve noon, prevailing time, of the business day next following
receipt of such executed Order Form or direction to execute an Order Form; or
(ii) upon receipt of confirmation by such broker-dealer of an investor's
interest in purchasing shares, and following an acknowledgment by such
broker-dealer to such investor on the next business day next following receipt
of confirmation, to debit the account of such investor on the third business day
next following receipt of confirmation and to forward the aggregate purchase
price to the Company on or before 12:00 noon, prevailing time, of the business
day next following such debiting.
Anyone with questions or requiring assistance concerning the procedures
for purchasing shares should call Stock Information Center at (412) ____________
and ask to speak to a representative about the Emclaire Financial Corp. Common
Stock Offering.
No Order Form is binding until accepted by the Company following
expiration of the Offering. The Company may, in its sole discretion, reject any
order in whole or in part without liability to the prospective purchaser.
Expiration Date
The Offering will terminate at 5:00 p.m., Eastern time, on
__________________, 1996 unless extended by the Company up to an additional 30
days. It is anticipated that a Selling Group will be utilized concurrently with
the Offering or commence subsequently thereafter at the discretion of Hopper
Soliday after consultation with the Company. The Offering, including the
Offering utilizing a Selling Group, must be completed within 30 days after the
close of the Offering, or _____________________, 1996 unless extended by the
Company. If the Offering is not completed within ____ days after the date the
Prospectus is declared effective by the Commission (by _____________, 1996), all
funds received will be returned promptly without interest.
Issuance of Common Stock
Certificates representing Common Stock issued in the Offering will be
mailed to the persons entitled thereto at the address noted on the Order Form,
as soon as practicable following consummation of the Offering. Any certificates
returned as undeliverable will be held until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of stock for which they
subscribed.
Restriction on Sales Activities
The Common Stock will be offered in the Offering principally by the
distribution of this Prospectus and through activities conducted at the Stock
Information Center located at the Main Office of the Bank, 612 Main Street,
Emlenton, Pennsylvania. The Stock Information Center is expected to operate
during normal business hours throughout the Offering. It is expected that a
registered representative employed by Hopper Soliday will be working at, and
supervising the operation of, the Stock Information Center. Hopper Soliday will
be responsible for overseeing the mailing of materials relating to the Offering,
responding to questions regarding the Offering and processing Order Forms. It is
expected that Bank and Company personnel will be present in the Stock
Information Center to assist Hopper Soliday with clerical matters and to answer
questions related solely to the business of the Company.
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<PAGE>
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and the Bank may
participate in the Offering in ministerial capacities or providing clerical work
in effecting a sales transaction. Such other employees have been instructed not
to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock. Questions of prospective purchasers will be directed
to executive officers of the Company or registered representatives of Hopper
Soliday. The Company will rely on Rule 3a4-1 promulgated under the Exchange Act,
and sales of Common Stock will be conducted in accordance with Rule 3a4-1, so as
to permit officers, directors, and employees to participate in the sale of
Common Stock. No officer, director, or employee of the Company or the Bank will
be compensated in connection with such person's solicitations or other
participation in the Offering by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the Common
Stock.
Restrictions on Sales
The executive officers and directors of the Company and the Company have
agreed that they will not offer, sell, contract to sell or grant an option to
purchase or otherwise dispose of any shares of the Common Stock in the open
market or otherwise, for a period of 90 days from the Expiration Date, without
the prior written consent of Hopper Soliday.
Right to Amend or Terminate the Offering
The Company expressly reserves the right to amend the terms and conditions
of the Offering, whether the terms and conditions are more or less favorable to
Offering participants. In the event of a material change to the terms of the
Offering, the Company will file a post-effective amendment to its Registration
Statement, of which this Prospectus is a part, and resolicit subscribers to the
extent required by the Commission. The Company expressly reserves the right, at
any time prior to delivery of shares of Common Stock offered hereby, to
terminate the Offering if the Offering is prohibited by law or regulation or the
Board of Directors concludes, in its judgment, that it is not in the best
interests of the Company to complete the Offering under the circumstances. The
Offering would be terminated by the Company by giving oral or written notice
thereof to Hopper Soliday and making a public announcement thereof. If the
Offering is so terminated, all funds received from Offering participants will be
promptly refunded, without interest.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain
legal matters in connection with the Offering will be passed upon for Hopper
Soliday by Pepper, Hamilton & Scheetz, Pittsburgh, Pennsylvania.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1995
and 1994, and for the years then ended are included herein in reliance upon the
report of S.R. Snodgrass, A.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
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<PAGE>
AVAILABLE INFORMATION
Neither the Company nor the Bank is currently subject to the informational
requirements of the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (herein, together with all amendments and exhibits, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered by
this Prospectus. This Prospectus contains information concerning the Company but
does not contain all of the information set forth in the Registration Statement.
The Registration Statement and other information filed by the Company with the
Commission can be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth St., N.W., Washington, D.C.
20549.
The Company furnishes to its shareholders annual reports containing
consolidated financial statements for each fiscal year audited by an independent
accounting firm.
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<PAGE>
EMCLAIRE FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Independent Auditors' Report ..............................................F-1
Consolidated Balance Sheet as of December 31, 1995 and 1994................F-2
Consolidated Statement of Income for the Years
Ended December 31, 1995 and 1994.........................................F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1995 and 1994 ......................... F-4
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1995 and 1994 ..................................F-5
Notes to Consolidated Financial Statements ................................F-6
Unaudited Consolidated Balance Sheet as of June 30, 1996 and 1995..........S-1
Unaudited Consolidated Statement of Income for the Three and Six
Months ended June 30, 1996 and 1995......................................S-2
Unaudited Consolidated Statement of Changes in
Stockholders' Equity for the Six Months ended June 30, 1996............. S-3
Unaudited Consolidated Statement of Cash Flows for the
Six Months ended June 30, 1996 and 1995 .................................S-4
Notes to Unaudited Consolidated Financial Statements ......................S-5
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
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<PAGE>
[LETTERHEAD OF S.R. SNODGRASS, A.C.]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Emclaire Financial Corp.
We have audited the consolidated balance sheet of Emclaire Financial Corp.
and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material 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. and Subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As explained in the notes to the consolidated financial statements,
effective January 1, 1995, the Company changed its method of accounting for
impaired loans and the related allowance for loan losses and effective
January 1, 1994, changed its method of accounting for investment securities.
/s/S.R. Snodgrass, A.C.
Wexford, PA
February 16, 1996, except for Note 15, as to
which the date is June 20, 1996
F-1
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,175,347 $ 3,624,304
Federal funds sold 2,500,000 900,000
Investment securities:
Available for sale 10,111,138 --
Held to maturity (approximate market value of
$16,299,328 and $24,757,249) 16,249,637 25,435,754
Loans 64,322,111 64,086,297
Less allowance for loan losses 687,415 687,578
------------ ------------
Net loans 63,634,696 63,398,719
Premises and equipment 1,663,096 1,655,543
Accrued interest and other assets 1,264,867 1,699,373
------------ ------------
TOTAL ASSETS $ 98,598,781 $ 96,713,693
============ ============
LIABILITIES
Deposits:
Noninterest - bearing demand $ 12,606,044 $ 13,138,034
Interest - bearing demand 12,370,668 13,083,280
Savings 12,805,694 12,731,538
Money market 15,604,881 18,738,869
Time 35,556,273 30,294,405
------------ ------------
Total deposits 88,943,560 87,986,126
Accrued interest and other liabilities 622,924 572,917
------------ ------------
TOTAL LIABILITIES 89,566,484 88,559,043
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; 12,000,000
shares authorized, 800,000 shares issued 1,000,000 1,000,000
Surplus 1,013,080 1,013,080
Retained earnings 6,959,932 6,147,970
Net unrealized gain on securities 65,685 --
Treasury stock, at cost (800 shares) (6,400) (6,400)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,032,297 8,154,650
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 98,598,781 $ 96,713,693
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
---------- ----------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $6,035,217 $5,497,595
Interest - bearing deposits in other banks 2,122 641
Federal funds sold 198,240 114,729
Investment securities:
Taxable 1,033,546 934,799
Exempt from federal income tax 168,164 202,776
---------- ----------
Total interest income 7,437,289 6,750,540
---------- ----------
INTEREST EXPENSE
Deposits 2,976,453 2,565,373
Lease obligations 9,943 7,278
---------- ----------
Total interest expense 2,986,396 2,572,651
---------- ----------
NET INTEREST INCOME 4,450,893 4,177,889
Provision for loan losses 143,000 132,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,307,893 4,045,889
---------- ----------
OTHER OPERATING INCOME
Service fees on deposit accounts 296,148 290,812
Other 92,786 93,896
---------- ----------
Total other operating income 388,934 384,708
---------- ----------
OTHER OPERATING EXPENSE
Salaries and employee benefits 1,544,172 1,429,555
Occupancy 157,256 153,189
Furniture and equipment 231,102 209,498
Other 1,072,227 1,107,175
---------- ----------
Total other operating expense 3,004,757 2,899,417
---------- ----------
Income before income taxes 1,692,070 1,531,180
Income taxes 520,468 453,854
---------- ----------
NET INCOME $1,171,602 $1,077,326
========== ==========
EARNINGS PER SHARE $ 1.47 $ 1.35
AVERAGE SHARES OUTSTANDING 799,200 799,200
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Retained Gain Treasury
Stock Surplus Earnings on Securities Stock Total
------------ ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 1,000,000 $ 1,013,080 $ 5,390,324 $ - $ (6,400) $ 7,397,004
Net income 1,077,326 1,077,326
Dividends declared
($.40 per share) (319,680) (319,680)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 1,000,000 1,013,080 6,147,970 - (6,400) 8,154,650
Net income 1,171,602 1,171,602
Dividends declared
($.45 per share) (359,640) (359,640)
Net unrealized gain on securities 65,685 65,685
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 $ 1,000,000 $ 1,013,080 $ 6,959,932 $ 65,685 $ (6,400) $ 9,032,297
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,171,602 $ 1,077,326
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 240,571 266,749
Amortization of investment security
discounts and premiums 224,633 284,286
Provision for loan losses and real estate owned 143,000 157,472
Deferred income taxes (24,062) (65,352)
Increase in accrued interest receivable (35,425) (154,073)
Increase in accrued interest payable 63,907 9,234
Other, net 111,108 (28,007)
----------- -----------
Net cash provided by operating activities 1,895,334 1,547,635
----------- -----------
INVESTING ACTIVITIES
Investment securities held to maturity:
Proceeds from maturities and repayments 6,524,531 3,715,569
Purchases (7,574,662) (6,256,093)
Net loan originations (332,827) (3,134,439)
Purchases of premises and equipment (153,913) (136,118)
Proceeds from sales of other real estate owned 231,163 31,096
----------- -----------
Net cash used for investing activities (1,305,708) (5,779,985)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits 957,434 990,049
Payments for obligation under capital lease (36,377) (38,702)
Cash dividends paid (359,640) (319,680)
----------- -----------
Net cash provided by financing activities 561,417 631,667
----------- -----------
Increase (decrease) in cash and
cash equivalent 1,151,043 (3,600,683)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,524,304 8,124,987
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,675,347 $ 4,524,304
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
EMCLAIRE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Emclaire Financial Corp. (Company) is a Pennsylvania corporation
organized as the holding company of the Farmers National Bank (Bank). The
Bank is a national association located in Pennsylvania. The Company's
principal sources of revenue emanate from its investment securities
portfolio, its portfolio of residential real estate, commercial mortgage,
commercial and consumer loans, as well as a variety of deposit services
offered to its customers through four offices. The Company is supervised
by the Board of Governors of the Federal Reserve System, while the Bank
is subject to regulation and supervision by the Office of the Comptroller
of the Currency.
Basis of Presentation
---------------------
The consolidated financial statements of the Company include its wholly -
owned subsidiary, the Bank. All intercompany transactions have been
eliminated in consolidation. The investment in subsidiary on the parent
company financial statements is carried at the parent company's equity
position in the underlying net assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates that are
subject to significant change in the near - term are the allowance for
loan losses and accrued pension benefits.
A summary of the significant accounting and reporting policies applied in
the presentation of the accompanying financial statements follows:
Investment Securities
---------------------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." In adopting Statement No. 115, the Company has
classified investment securities into two categories: Held to Maturity
and Available for Sale. Debt securities acquired with the intent to hold
to maturity are stated at cost adjusted for amortization of premium and
accretion of discount which are computed using the interest method and
recognized as adjustments of interest income. Certain other debt
securities have been classified as available for sale to serve
principally for liquidity purposes. Unrealized holding gains and losses
for available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities
gains and losses are computed using the specific identification method.
Interest and dividends on securities are recognized as income when
earned.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank
represents ownership in institutions which are wholly - owned by other
financial institutions. These equity securities are accounted for at
cost.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
-----
Loans are reported at their principal amount net of the allowance for
loan losses. Interest on all loans is recognized as income when earned on
the accrual method. The accrual of interest is discontinued on a loan
when management believes, after considering economic and business
conditions, that the borrower's financial condition is such that
collection of interest is doubtful. Interest payments received on
nonaccrual loans is recorded as income or applied against principal
according to management's judgment as to the collectibility of such
principal.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by Statement No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
Under this Standard, the Company estimates credit losses on impaired
loans based on the present value of expected cash flows or the fair value
of the underlying collateral if the loan repayment is expected to come
from the sale or operation of such collateral. For purposes of this
Standard, nonaccrual commercial and commercial real estate loans are
considered to be impaired. Prior to 1995, the credit losses related to
these loans were estimated based on undiscounted cash flows or the fair
value of the underlying collateral.
Statement No. 118 amends Statement No. 114 to permit a creditor to use
existing methods for recognizing interest income on impaired loans
eliminating the income recognition provisions of Statement No. 114. The
adoption of Statements No. 114 and No. 118 had no material effect on the
Company's financial position or results of operations.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related
loan yield. The Company is amortizing these amounts over the contractual
lives of the related loans.
Allowance for Loan Losses
-------------------------
The Bank uses the allowance method in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. The allowance for loan losses is
established through a provision for loan losses charged to operations.
The allowance is maintained at a level believed by management to be
sufficient to absorb estimated potential credit losses. Management's
determination of the adequacy of the allowance is based on periodic
evaluations of the credit portfolio and other relevant factors. This
evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of expected future cash flows on
impaired loans, which may be susceptible to significant change. The
allowance for loan losses on impaired loans is one component of the
methodology for determining the allowance for loan losses. The remaining
components of the allowance for loan losses provide for estimated losses
on commercial loans, consumer loans, real estate mortgages, and general
amounts for historical loss experience, uncertainties in estimating
losses and inherent risks in the various credit portfolio.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight - line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
charged against income as incurred. Costs of major additions and
improvements are capitalized.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
-----------------
Real estate owned acquired in settlement of foreclosed loans is carried
as a component of other assets at the lower of cost or fair value minus
estimated cost to sell. Valuation allowances for estimated losses are
provided when the carrying value of the real estate acquired exceeds the
fair value. Direct costs incurred in the foreclosure process and
subsequent holding costs incurred on such properties are recorded as
expenses of current operations.
Intangible Assets
-----------------
Intangible assets represent core deposit premiums paid for acquired
branch offices. The core deposit |premiums are amortized using the
straight - line method over an eight year period.
Pension Plan
------------
The Bank maintains a non - contributory defined benefit pension plan
covering substantially all employees and officers. The plan calls for
benefits to be paid to eligible employees at retirement based primarily
upon years of service with the Bank and compensation rates near
retirement.
Income Taxes
------------
The Company and the Bank file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Earnings Per Share
------------------
Earnings per share are calculated using the weighted average number of
shares of stock outstanding for the periods presented.
Cash Flow Information
---------------------
The Company has defined cash equivalents as those amounts included in due
from banks and federal funds sold.
Cash payments for interest in 1995 and 1994 were $2,922,489 and
$2,563,417, respectively. Cash payments for income taxes in 1995 and 1994
were $541,000 and $483,448, respectively.
During 1994, the Company transferred $335,072 from loans to real estate
owned. In addition, a capital lease obligation for $199,683 was initiated
to record an in - house computer system upgrade.
F-8
<PAGE>
2. INVESTMENT SECURITIES
In December, 1995, in accordance with the Financial Accounting Standards
Board Special Report, "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities," the
Company reclassified investment securities from the held to maturity
classification to the available for sale classification with an amortized
cost of $10,012,503 and an estimated market value of $10,057,238. The net
appreciation of these securities was recorded net of federal income taxes
to an unrealized gain account, which is a component of stockholders'
equity.
The amortized cost and estimated market values of investment securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 9,593,915 $ 121,733 $ (22,210) $ 9,693,438
Equity securities 417,700 - - 417,700
------------ ------------ ------------ ------------
Total $ 10,011,615 $ 121,733 $ (22,210) $ 10,111,138
============ ============ ============ ============
</TABLE>
The amortized cost and estimated market values of investment securities
held to maturity are summarized as follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
HELD TO MATURITY
U. S. Treasury securities and
obligations of U. S. Government
<S> <C> <C> <C> <C>
corporations and agencies $ 7,077,756 $ 26,891 $ (4,147) $ 7,100,500
Obligations of states and political
subdivisions 3,869,528 3,262 (9,283) 3,863,507
Corporate notes 2,758,448 52,433 (5,451) 2,805,430
Mortgage-backed securities 2,543,905 2,276 (16,290) 2,529,891
------------ ------------ ------------ ------------
Total $ 16,249,637 $ 84,862 $ (35,171) $ 16,299,328
============ ============ ============ ============
</TABLE>
F-9
<PAGE>
2. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
HELD TO MATURITY
U. S. Treasury securities and
obligations of U. S. Government
<S> <C> <C> <C> <C>
corporations and agencies $ 12,773,029 $ 2,700 $ (442,919) $ 12,332,810
Obligations of states and political
subdivisions 5,194,333 - (86,514) 5,107,819
Corporate notes 3,372,369 - (52,069) 3,320,300
Mortgage-backed securities 3,679,223 - (99,703) 3,579,520
------------ ------------ ------------ ------------
Total debt securities 25,018,954 2,700 (681,205) 24,340,449
Equity securities 416,800 - - 416,800
------------ ------------ ------------ ------------
Total $ 25,435,754 $ 2,700 $ (681,205) $ 24,757,249
============ ============ ============ ============
</TABLE>
Investment securities with an amortized cost and estimated market value
of approximately $3,547,442 and $3,551,250, respectively, at December 31,
1995, and $2,688,000 and $2,547,750, respectively, at December 31, 1994,
were pledged to secure deposits and for other purposes as required by
law.
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 8,121,953 $ 8,160,915
Due after one year through
five years 9,593,915 9,693,438 5,583,779 5,608,522
----------- ----------- ----------- -----------
9,593,915 9,693,438 13,705,732 13,769,437
Mortgage-backed securities -- -- 2,543,905 2,529,891
----------- ----------- ----------- -----------
Total $ 9,593,915 $ 9,693,438 $16,249,637 $16,299,328
=========== =========== =========== ===========
</TABLE>
F-10
<PAGE>
3. LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Commercial and industrial $ 9,611,079 $ 8,575,910
Real estate mortgages 42,164,981 42,736,409
Consumer 12,546,051 12,773,978
----------- -----------
64,322,111 64,086,297
Less allowance for loan losses 687,415 687,578
----------- -----------
Net loans $63,634,696 $63,398,719
=========== ===========
</TABLE>
In the normal course of business, loans are extended to directors,
executive officers, and their associates. In management's opinion, all of
these loans are on substantially the same terms and conditions as loans
to other individuals and businesses of comparable creditworthiness. A
summary of loan activity for those directors, executive officers, and
their associates with aggregate loan balances in excess of $60,000 for
the year ended December 31, 1995, is as follows:
Balance Balance
December 31, Amounts December 31,
1994 Additions Collected 1995
------------ --------- --------- ------------
$ 1,061,231 1,021,967 693,501 $ 1,389,697
The Bank's primary business activity is with customers located within
Venango, Clarion, and Butler Counties. Commercial, residential, personal,
and agricultural loans are granted. Although the Bank has a diversified
loan portfolio at December 31, 1995 and 1994, loans outstanding to
individuals and businesses are dependent upon the local economic
conditions within the immediate trade area.
Loans on which the accrual of interest has been discontinued amounted to
$441,000 at December 31, 1994. If interest on these loans had been
accrued, interest income would have been increased by approximately
$22,200 for 1994. At December 31, 1995, the Bank had no impaired loans.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows:
1995 1994
-------- --------
Balance, January 1 $687,578 $638,965
Add:
Provision charged to operations 143,000 132,000
Recoveries 61,869 43,852
Less loans charged off 205,032 127,239
-------- --------
Balance, December 31 $687,415 $687,578
======== ========
For federal income tax purposes the reserve for loan losses is maintained
at the maximum allowable under the Internal Revenue Code and approximated
$158,053 at December 31, 1995 and 1994.
F-11
<PAGE>
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as
follows:
1995 1994
---------- ----------
Land and improvements $ 208,742 $ 185,085
Buildings 1,358,247 1,349,232
Furniture and fixtures 1,025,630 904,388
2,592,619 2,438,705
---------- ----------
Less accumulated depreciation 929,523 783,162
---------- ----------
Total $1,663,096 $1,655,543
========== ==========
Depreciation and amortization charged to operations was $146,361 in 1995
and $143,397 in 1994.
6. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more. Such deposits aggregated $3,597,000 and $2,640,000 at
December 31, 1995 and 1994, respectively.
7. OTHER EXPENSE
The following is an analysis of other expense:
1995 1994
---------- ----------
Advertising $ 71,156 $ 46,420
Amortization of intangible assets 91,115 99,448
Professional services 76,931 73,002
FDIC insurance 100,722 194,963
Forms and supplies 101,854 108,715
Postage 93,596 84,907
Other 536,853 499,720
---------- ----------
Total $1,072,227 $1,107,175
========== ==========
8. INCOME TAXES
The provision for income taxes is summarized as follows:
1995 1994
--------- ---------
Currently payable $ 544,530 $ 519,206
Deferred (24,062) (65,352)
--------- ---------
Total provision $ 520,468 $ 453,854
========= =========
F-12
<PAGE>
8. INCOME TAXES (Continued)
The tax effects of deductible and taxable temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities, respectively, at December 31 are as follows:
1995 1994
-------- --------
Deferred tax assets:
Provision for loan losses $179,983 $180,039
Core deposit intangible amortization 33,977 21,985
Capital lease obligation 48,648 61,016
Provision for loss on other real estate owned -- 8,500
Pension expense 10,762 3,368
-------- --------
Gross deferred tax assets 273,370 274,908
Less valuation allowance -- --
-------- --------
Deferred tax assets after allowance 273,370 274,908
-------- --------
Deferred tax liabilities:
Net unrealized gain on securities 33,838 --
Depreciation 166,422 172,526
Loan origination costs, net 5,742 4,120
Cash to accrual conversion -- 32,983
Discount accretion 13,559 1,694
-------- --------
Gross deferred tax liabilities 219,561 211,323
-------- --------
Net deferred tax asset $ 53,809 $ 63,585
======== ========
No valuation allowance was established at December 31, 1995 and 1994, in
view of the Company's ability to carry - back to taxes paid in previous
years and future anticipated taxable income which is evidenced by the
Company's earnings potential.
The reconciliation between the federal statutory rate and the Company's
effective income tax rate is as follows:
1995 1994
-------------------- -----------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
---------- --------- --------- --------
Provision at statutory rate $ 575,304 34.0 % $ 520,601 34.0 %
Effect of tax exempt income (57,450) (3.4) (77,716) (5.1)
Other 2,614 0.2 10,969 0.7
--------- ---- ------- ----
Actual tax expense and
effective rate $ 520,468 30.8 % $ 453,854 29.6 %
========= ==== ======= ====
F-13
<PAGE>
9. PENSION PLAN
The following presents the components of the pension expense for each
year.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost of benefits earned during the period $ 47,800 $ 54,034
Interest cost on projected benefit obligation 62,534 59,388
Return on plan assets (287,502) 8,531
Net amortization and deferral 186,302 (109,340)
--------- ---------
Net periodic pension cost $ 9,134 $ 12,613
========= =========
</TABLE>
The actuarial present value of accumulated benefit obligations at
December 31, 1995 and 1994, was $607,113 and $466,572 including vested
benefit obligations of $600,275 and $463,355. The following table sets
forth the funded status and amounts recognized in the balance sheets at
December 31:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Plan assets at fair value $ 1,339,813 $ 1,059,208
Projected benefit obligation 1,010,270 763,726
------------- -------------
Funded status 329,543 295,482
Unrecognized net gain from past experience different
from that assumed (233,154) (181,940)
Unamortized prior service cost 1,174 1,246
Unrecognized net transition asset (129,216) (137,307)
------------- -------------
Accrued pension cost $ (31,653) $ (22,519)
============= =============
</TABLE>
Plan assets primarily consist of debt and equity mutual funds at December
31, 1995 and 1994.
In preparing the above information the following actuarially assumed
rates were used.
1995 1994
---- ----
Discount rate 7.50 % 8.25 %
Rate of increase in future compensation levels 5.00 5.00
Rate of return on plan assets 8.50 8.50
10. AVAILABLE LINE OF CREDIT
The Bank had a credit arrangement with a borrowing limit at December 31,
1995, of approximately $9,844,000 with the Federal Home Loan Bank of
Pittsburgh. This credit line is subject to annual renewal, incurs no
service charges, and is secured by a blanket security agreement on
outstanding residential mortgage loans. There were no outstanding
borrowings on this line of credit during 1995 and 1994.
F-14
<PAGE>
11. COMMITMENTS
In the normal course of business, the Bank makes various commitments
which are not reflected in the accompanying financial statements. The
Bank offers such products to enable its customers to meet their financing
objectives. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
balance sheet. The Bank's exposure to credit loss in the event of
nonperformance by the other parties to the financial instruments is
represented by the contractual amounts as disclosed. Losses, if any, are
charged to the allowance for loan losses. The Bank minimizes its exposure
to credit loss under these commitments by subjecting them to credit
approval and review procedures and collateral requirements as deemed
necessary.
The off - balance sheet commitments were comprised of the following at
December 31:
1995 1994
------------ ------------
Commitments to extend credit $ 5,002,000 $ 4,473,000
Standby letters of credit 1,089,000 778,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan
agreement. These commitments are comprised primarily of available
commercial and personal lines of credit and loans approved but not yet
funded. The Bank uses the same credit policies in making loan commitments
and conditional obligations as it does for on - balance sheet
instruments. Since many of the credit line commitments are expected to
expire without being fully drawn upon, the total contractual amounts do
not necessarily represent future funding requirements.
Standby letters of credit obligate the Bank to disburse funds to a third
party if the Bank's customer fails to perform under the terms of the
agreement with the beneficiary. These instruments are issued primarily to
support bid or performance - related contracts. The coverage period for
these instruments is typically a one year period with an annual renewal
option subject to prior approval by management. The Bank holds collateral
for these instruments, as deemed necessary, which are typically Bank
deposit instruments.
12. REGULATORY RESTRICTIONS
Cash and Due from Banks
-----------------------
The district Federal Reserve Bank requires the Bank to maintain certain
reserve balances. As of December 31, 1995 and 1994, the Bank had required
reserves of $603,000 and $639,000 comprised of vault cash, and a
depository amount held with the Federal Reserve Bank.
Loans
-----
The Federal Reserve Act limits extensions of credit by the Bank to the
Company and requires such credits to be collateralized. Further such
secured loans are limited in amount to 10% of the Bank's capital surplus.
There were no loans outstanding between the Bank and the Company at
December 31, 1995 and 1994.
F-15
<PAGE>
12. REGULATORY RESTRICTIONS (Continued)
Dividends
---------
The Bank is subject to a dividend restriction which generally limits the
amount of dividends that can be paid by a national bank. Prior approval
of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds net
profits as defined for the year combined with its retained net profits
for the two preceding calendar years less any required transfers to
surplus. Using this formula, the amount available for payment of
dividends by the Bank in 1996, without approval of the Comptroller, will
be limited to $1,585,000 plus net profits retained up to the date of the
dividend declaration.
Regulatory Capital Requirements
-------------------------------
The Bank is subject to risk - based capital rules. These guidelines
include a common framework for defining elements of capital and a system
for relating capital to risk. The minimum total risk - based capital
requirement is 8.00%. The capital position of the Bank as of December 31,
1995 and 1994, as calculated by management, was 15.92% and 14.16%,
respectively.
Additionally, the general regulatory guidelines establish a minimum ratio
of leverage capital to adjusted total assets of 3.00% for top rated
financial institutions. Less highly rated institutions, or those with
higher levels of risk, are required to maintain ratios 100 to 200 basis
points above the minimum level. The Bank's ratios under these guidelines,
as calculated by management, as of December 31, 1995 and 1994, were 8.71%
and 7.99%, respectively.
Based upon these guidelines, at December 31, 1995 and 1994, the Bank is
classified as "Well Capitalized."
13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose
the estimated fair value of its financial instruments.
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or right
to receive or deliver cash or another financial instrument from/to a
second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than
in a forced or liquidation sale. If a quoted market price is available
for a financial instrument, the estimated fair value would be calculated
based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments would be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated fair values may
not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which
the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
F-16
<PAGE>
13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
As certain assets and liabilities, such as deferred tax assets and
premises and equipment, are not considered financial instruments, the
estimated fair value of financial instruments would not represent the
full value of the Company.
The Company employed simulation modeling in determining the estimated
fair value of financial instruments for which quoted market prices were
not available based upon the following assumptions:
Cash and Due From Banks, Federal Funds Sold, Accrued Interest Receivable,
-------------------------------------------------------------------------
and Accrued Interest Payable
----------------------------
The fair value is equal to the current carrying value.
Investment Securities
---------------------
The fair value of securities held to maturity is equal to the available
quoted market price. If no quoted market price is available, fair value
is estimated using the quoted market price for similar securities.
The fair value of securities available for sale is equal to the current
carrying value.
Loans and Deposits
------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating
expenses, non - interest income, credit quality, and prepayment risk.
Demand, savings, and money market deposit accounts are valued at the
amount payable on demand as of year end. Fair value for time deposits are
estimated using a discounted cash flow calculation that applies
contractual costs currently being offered in the existing portfolio to
current market rates being offered for deposits of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
These financial instruments are generally not subject to sale and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment or letter of credit, and the fair value, determined by
discounting the remaining contractual fee over the term of the commitment
using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The
contractual amounts of unfunded commitments and letters of credit are
presented in the Commitments and Contingent Liabilities note.
F-17
<PAGE>
13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values at December 31, 1995, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
1995
--------------------------
Carrying Fair
Value Value
------------ ------------
Financial assets:
<S> <C> <C>
Cash and due from banks and federal funds sold $ 5,675,347 $ 5,675,347
Investment securities available for sale 10,111,138 10,111,138
Investment securities held to maturity 16,249,637 16,299,328
Net loans 63,634,696 65,317,000
Accrued interest receivable 753,195 753,195
------------ ------------
Total $ 96,424,013 $ 98,156,008
============ ============
Financial liabilities:
Deposits $ 88,943,560 $ 89,259,000
Accrued interest payable 259,603 259,603
------------ ------------
Total $ 89,203,163 $ 89,518,603
============ ============
</TABLE>
14. PARENT COMPANY
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Cash on deposit in subsidiary bank $ 10,024 $ 8,419
Investment in subsidiary 9,019,643 8,137,172
Other assets 2,630 9,059
------------ ------------
Total assets $ 9,032,297 $ 8,154,650
============ ============
STOCKHOLDERS' EQUITY $ 9,032,297 $ 8,154,650
============ ============
</TABLE>
F-18
<PAGE>
14. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------- ------------
INCOME
<S> <C> <C>
Dividends from subsidiary $ 359,640 $ 319,680
EXPENSES 7,310 15,481
------------- ------------
Income before income taxes 352,330 304,199
Income tax benefit (2,486) (5,264)
------------- ------------
Income before equity in undistributed earnings of subsidiary 354,816 309,463
Equity in undistributed earnings of subsidiary 816,786 767,863
------------- ------------
NET INCOME $ 1,171,602 $ 1,077,326
============= ============
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,171,602 $ 1,077,326
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiary (816,786) (767,863)
Amortization 3,097 12,487
Other, net 3,332 5,610
------------ ------------
Net cash provided by operating activities 361,245 327,560
------------ ------------
FINANCING ACTIVITIES
Cash dividends paid (359,640) (319,680)
------------ ------------
Increase in cash 1,605 7,880
CASH AT BEGINNING OF YEAR 8,419 539
------------ ------------
CASH AT END OF YEAR $ 10,024 $ 8,419
============ ============
</TABLE>
15. STOCK SPLIT
On June 20, 1996, the Company effected a four - for - one stock split of
its common stock. As a result of this transaction, the authorized and
issued number of shares increased from 3,000,000 and 200,000 to
12,000,000 and 800,000, respectively, and the par value was reduced from
$5.00 per share to $1.25 per share. All references in the accompanying
financial statements to the number of shares and the per share amounts
have been restated to reflect this stock split.
F-19
<PAGE>
EMCLAIRE FINANCIAL CORP.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1996
----
ASSETS
<S> <C>
Cash and due from banks..................................................... $ 4,056,998
Investment securities:
Available for sale........................................................ 23,044,609
Held to maturity (estimated market value of $15,463,241
and $22,029,000)........................................................ 15,621,248
Loans....................................................................... 63,446,109
Less allowance for loan losses.............................................. 724,346
-----------
Net loans................................................................. 62,721,763
Premises and equipment...................................................... 2,140,059
Accrued interest and other assets........................................... 1,813,640
-----------
TOTAL ASSETS............................................................. $109,398,317
===========
LIABILITIES
Deposits
Non-interest bearing demand............................................... $ 14,120,915
Interest bearing demand................................................... 11,674,860
Savings................................................................... 13,549,128
Money market.............................................................. 16,788,332
Time...................................................................... 38,517,090
-----------
Total deposits......................................................... 94,650,325
Short-term borrowings....................................................... 5,000,000
Obligation under capital lease.............................................. 123,918
Accrued interest and other liabilities...................................... 433,377
-----------
TOTAL LIABILITIES........................................................ 100,207,620
-----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share; 12,000,000 shares
authorized, 800,000 shares issued......................................... 1,000,000
Additional paid in capital.................................................. 1,013,080
Retained earnings........................................................... 7,293,297
Net unrealized loss on securities........................................... (109,280)
Treasury stock, at cost (800 shares)........................................ (6,400)
-----------
TOTAL STOCKHOLDERS' EQUITY............................................... 9,190,697
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY................................................... $109,398,317
===========
</TABLE>
See accompanying notes to the consolidated financial statements.
S-1
<PAGE>
EMCLAIRE FINANCIAL CORP.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1995 1994
----------- ---------- ---------- ----------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans, including fees ........................................ $1,407,188 $1,494,743 $2,885,556 $2,942,322
Interest bearing deposits in other banks ..................... 404 498 1,118 887
Federal funds sold ........................................... 37,833 45,731 76,767 71,677
Investment securities:
Taxable .................................................... 416,418 248,766 734,788 492,289
Exempt from federal income tax ............................. 32,712 42,911 67,854 87,993
---------- ---------- ---------- ----------
Total interest income .................................... 1,894,555 1,832,649 3,766,083 3,595,168
INTEREST EXPENSE
Deposits ..................................................... 760,835 737,869 1,521,506 1,431,926
Short-term borrowings ........................................ 13,499 -- 13,499 --
Lease obligation ............................................. 1,963 3,047 3,995 5,712
---------- ---------- ---------- ----------
Total interest expense .................................... 776,297 740,916 1,539,000 1,437,638
---------- ---------- ---------- ----------
NET INTEREST INCOME ............................................ 1,118,258 1,091,733 2,227,083 2,157,530
Provision for loan losses ...................................... 36,000 36,000 72,000 72,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES .............................................. 1,082,258 1,055,733 2,155,083 2,085,530
---------- ---------- ---------- ----------
OTHER OPERATING INCOME
Service fees on deposit accounts ............................. 82,061 75,164 156,709 141,613
Other ........................................................ 19,380 29,993 38,479 51,252
---------- ---------- ---------- ----------
Total other operating income .............................. 101,441 105,157 195,188 192,865
---------- ---------- ---------- ----------
OTHER OPERATING EXPENSE
Salaries and employee benefits ............................... 511,915 402,940 887,735 753,549
Occupancy, furniture and equipment ........................... 111,093 95,968 219,469 196,031
Other ........................................................ 277,637 295,171 517,820 581,730
---------- ---------- ---------- ----------
Total other operating expense ............................. 900,645 794,079 1,625,024 1,531,310
---------- ---------- ---------- ----------
Income before income taxes ..................................... 283,054 366,811 725,247 747,085
Income taxes ................................................... 85,190 109,581 224,050 225,981
---------- ---------- ---------- ----------
NET INCOME ..................................................... $ 197,864 $ 257,230 $ 501,197 $ 521,104
========== ========== ========== ==========
EARNINGS PER SHARE ............................................. $ 0.25 $ 0.32 $ 0.63 $ 0.65
AVERAGE SHARES OUTSTANDING ..................................... 799,200 799,200 799,200 799,200
DIVIDEND PER SHARE ............................................. $ 0.11 $ 0.10 $ 0.21 $ 0.20
</TABLE>
See accompanying notes to the consolidated financial statements
S-2
<PAGE>
EMCLAIRE FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid in Retained Gain (Loss) Treasury
Stock Capital Earnings on Securities Stock Total
----- ------- -------- ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $1,000,000 $1,013,080 $6,959,932 $ 65,685 $ (6,400) $9,032,297
Net income .............. 501,197 501,197
Dividends declared ($.21
per share)............. (167,832) (167,832)
Net unrealized loss on
securities.............. (174,965) (174,965)
---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 1996.... $1,000,000 $1,013,080 $7,293,297 $ (109,280) $ (6,400) $9,190,697
========== ========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
S-3
<PAGE>
EMCLAIRE FINANCIAL CORP.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1996 1996
------------ ----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income................................................................ $ 501,197 $ 521,104
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................................... 136,620 128,316
Net amortization of investment security
discounts and premiums.............................................. 117,845 126,013
Provision for loan losses............................................. 72,000 72,000
(Increase) decrease in accrued interest receivable.................... (252,709) 22,505
Increase in accrued interest payable.................................. 25,715 59,608
Other, net............................................................ (277,785) (148,880)
---------- ----------
Net cash provided by operating activities........................... 322,883 780,666
---------- ----------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Held to maturity........................................................ 3,669,806 4,094,653
Purchases of investment securities:
Available for sale...................................................... (13,221,460) --
Held to maturity........................................................ (3,136,371) (974,610)
Net loan repayments (originations)........................................ 788,221 (963,754)
Purchases of premises and equipment....................................... (561,196) (2,824)
Proceeds from sales of other real estate.................................. -- 96,751
---------- ----------
Net cash (used for) provided by investing activities................ (12,461,000) 2,250,216
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits....................................... 5,706,765 (152,457)
Net increase in short-term borrowings..................................... 5,000,000 --
Payments for obligation under capital lease............................... (19,165) (17,954)
Cash dividends paid....................................................... (167,832) (159,840)
---------- ----------
Net cash provided by (used for) financing activities................ 10,519,768 (330,251)
---------- ----------
Increase (decrease) in cash and cash equivalents.................... (1,618,349) 2,700,631
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 5,675,347 4,524,304
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 4,056,998 $7,224,935
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
S-4
<PAGE>
EMCLAIRE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accounting and financial reporting policies of Emclaire Financial Corp. and
its wholly-owned subsidiary, The Farmers National Bank of Emlenton ("Bank"),
conform to generally accepted accounting principles and to general practice
within the banking industry. In the opinion of management, the accompanying
unaudited consolidated financial statements of Emclaire Financial Corp.
("Company") contain all adjustments, consisting of only normal and recurring
adjustments, necessary for the fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
2. COMMON STOCK
Stock Split
On June 20, 1996, the Company effected a four-for-one split of its common stock.
As a result of this transaction, the authorized and issued number of shares
increased from 3,000,000 and 200,000 to 12,000,000 and 800,000, respectively,
and the par value was reduced from $5.00 per share to $1.25 per share. All
references in the accompanying financial statements to the number of shares and
the per share amounts have been restated to reflect this stock split.
Proposed Stock Sale
On July 12, 1996, the Board of Directors of the Company approved the offering
for sale of up to 230,800 shares of common stock. These shares are to be sold by
prospectus only at a price to be determined prior to commencement of the sale.
It is anticipated the sale of these shares will commence during the fourth
quarter of 1996.
3. PENDING BRANCH ACQUISITION
On September 20, 1996, the Bank acquired certain deposit liabilities of the
Knox, Pennsylvania office of Mellon Bank, N.A. in a transaction recorded as a
branch purchase. The Bank assumed deposit liabilities of approximately $14.1
million and acquired the land, building and equipment. The amount by which the
acquisition cost exceeded the value of the assets purchased, totaling
approximately $1.4 million, was recorded as an intangible asset.
S-5
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ------------ ------------
Available for Sale
U.S. Treasury securities and
Obligations of U.S. Government
<S> <C> <C> <C> <C>
corporations and agencies ........ $17,577,445 $ 25,052 $ (127,389) $17,475,108
Corporate notes .................... 5,192,339 -- (63,238) 5,129,101
----------- ----------- ----------- -----------
Total debt securities ........... 22,769,784 25,052 (190,627) 22,604,209
Equity investment in Federal Reserve
and Federal Home Loan Banks ...... 440,400 -- -- 440,400
----------- ----------- ----------- -----------
Total ........................... $23,210,184 $ 25,052 $ (190,627) $23,044,609
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ------------ ------------
Held to Maturity
U.S. Treasury securities and
Obligations of U.S. Government
<S> <C> <C> <C> <C>
corporations and agencies ....... $ 6,035,375 $ -- $ (29,469) $ 6,005,906
Obligations of states and political
subdivisions .................... 3,469,630 1,900 (13,868) 3,457,662
Corporate notes ................... 4,358,031 4,491 (62,590) 4,299,932
Mortgage-backed securities ........ 1,758,212 -- (58,471) 1,699,741
----------- ----------- ----------- -----------
Total .......................... $15,621,248 $ 6,391 $ (164,398) $15,463,241
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value and an estimated market value of
$3,077,390 and $3,067,430, respectively were pledged to secure public deposits
and other purposes as required by law.
S-6
<PAGE>
The amortized cost and estimated market value of debt securities at June 30,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------------- ----------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.......................... $ 2,017,847 $ 2,015,000 $ 7,394,212 $ 7,392,828
Due after 1 year through 5 years................. 19,128,304 18,970,990 6,468,824 6,370,672
Due after 5 years through 10 years............... 1,623,633 1,618,219 -- --
----------- ----------- ----------- -----------
22,769,784 22,604,209 13,863,036 13,763,500
Mortgage-backed securities ...................... -- -- 1,758,212 1,699,741
----------- ----------- ----------- -----------
Total......................................... $22,769,784 $22,604,209 $15,621,248 $15,463,241
========== ========== ========== ==========
</TABLE>
5. IMPAIRED LOANS
At June 30, 1996, the recorded investment in loans which are considered to be
impaired was $831,381, all of which was placed in nonaccrual status. In
addition, $93,000 of the related allowance for loan losses has been allocated
for these impaired loans. At June 30, 1996, there were commitments for unfunded
letters of credit totalling $7,500, to a borrower with outstanding loans
considered to be impaired.
The average recorded investment in impaired loans during the six months ended
June 30, 1996, was approximately $840,791. For the six months ended June 30,
1996, interest income totalling $13,330 was recognized on impaired loans, all of
which was recognized using the cash basis method of income recognition.
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and a Federal Home Loan
Bank ("FHLB") borrowing which matures September 12, 1996. It is expected the
FHLB borrowing will be renewed at maturity until the completion of the branch
acquisition described in Note 3, when it will be repaid from the cash proceeds
received. The outstanding balances and related information for short-term
borrowings are summarized as follows:
<TABLE>
<CAPTION>
Federal Home Federal
Loan Bank Funds
Advance Purchased
------------ ------------
<S> <C> <C>
Average balance outstanding during the period... $ 417,582 $ 71,429
Maximum amount outstanding at any
month-end during the period................... $4,000,000 $1,000,000
Weighted average interest rate.................. 5.54% 5.05%
Total short-term borrowings at period end....... $4,000,000 $1,000,000
</TABLE>
S-7
<PAGE>
The Bank maintains a revolving line of credit with a borrowing limit of
approximately $3.15 million with the FHLB. This credit line is subject to annual
renewal, incurs no service charges, and is secured by a blanket security
agreement on outstanding residential mortgage loans and FHLB stock held by the
Bank. In addition, the Bank has a revolving federal funds line of credit with a
borrowing limit of $2 million with a correspondent Bank. This credit line is
subject to annual renewal, incurs no service charges and is unsecured. At June
30, 1996, no amounts were outstanding on the FHLB line of credit, and $1 million
was outstanding in federal funds purchased.
S-8
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus in connection
with the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Bank or
the Company. This prospectus does not constitute an offer to sell, or the
solicitation of an offer to buy, any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation would be
unlawful. Neither the delivery of this prospectus by the Bank or the Company nor
any sale made hereunder shall in any circumstances create an implication that
there has been no change in the affairs of the Bank or the Company since any of
the dates as of which information is furnished herein or since the date hereof.
TABLE OF CONTENTS
Page
Additional Information..............
Summary.............................
Selected Financial and Other Data...
Recent Developments - Branch Acquisition
Risk Factors........................
Use of Proceeds.....................
Market Information..................
Dividends...........................
Capitalization......................
Pro Forma Data......................
Management's Discussion and Analysis
Business............................
Management..........................
Plan of Distribution................
Description of Capital Stock........
Legal Matters.......................
Experts.............................
Index to Financial Statements.......
Until the later of _____ _, 1996, or 25 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Up to 200,800 Shares
Common Stock
[LOGO]
EMCLAIRE FINANCIAL CORP.
Holding Company for The Farmers National Bank of Emlenton
PROSPECTUS
HOPPER SOLIDAY & CO., INC.
Dated: _______ __, 1996
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The officers, directors, agents, and employees of the Company are
indemnified with respect to certain actions pursuant to Pennsylvania law and the
Bylaws of the Corporation.
Pennsylvania corporate law provides broad statutory indemnification for
directors, officers, employees, and agents including the right to maintain
insurance. Pennsylvania law requires mandatory indemnification for expenses if a
representative of a company is successful on the merits or otherwise, in either
a third party or derivative action.
The aforementioned indemnification provisions under Pennsylvania law
are non-exclusive. A Pennsylvania corporation may grant additional
indemnification rights through its bylaws or through an agreement, a vote of
stockholders, or a vote of disinterested directors and may create a fund of any
nature to secure its indemnification obligations
Section 24.1 of the Bylaws of the Company relates to third party
actions. The Company has the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company), by reason of the fact
that he is or was a representative of the Company, or is or was serving at the
request of the Company as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action or proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Company and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner that he reasonably believed to
be in, or not opposed to, the best interests of the Company and, with respect to
any criminal proceeding, had reasonable cause to believe that his conduct was
unlawful.
Section 24.2 of the Bylaws of the Company relates to derivative
actions. The Company has the power to indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action by or in the right of the Company to procure a judgment in its
favor by reason of the fact that he is or was a representative of the Company or
is or was serving at the request of the Company as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of the action if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Company.
Indemnification may not be made under this section of the Bylaws in respect of
any claim, issue or matter as to which the person has been adjudged to be liable
to the Company unless and only to the extent that the court of common pleas of
the judicial district embracing the county in which the registered office of the
Company is located or the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses that the court of common pleas or other court deems
proper.
Section 24.3 of the Bylaws of the Company relates to when a person is
entitled to mandatory
<PAGE>
indemnification. To the extent that a representative of the Company has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in Sections 24.1 (relating to third party actions) or 24.2 (relating
to derivative actions) or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Company maintains insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Company or is or was serving at the
request of the Company as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against any
liability asserted and incurred such person in any such capacity or arising out
of such person's status as such, whether or not the Company would have the power
to indemnify such person against such liability under the provisions of the
Bylaws or Pennsylvania law.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and
commissions, in connection with the Offering are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
* Special counsel and local counsel legal fees.......................................... $ 32,500
* Printing.............................................................................. 7,500
* Postage and mailing................................................................... 10,000
* Accounting fees....................................................................... 10,000
* SEC Registration Fee.................................................................. 1,075
* NASD Fairness Filing.................................................................. 1,000
* Blue Sky legal and filing fees........................................................ 5,000
* Underwriter's expenses, including legal fees.......................................... 125,000
* Stock Certificates.................................................................... 1,000
* Reimbursable and other expenses....................................................... 16,925
------
* TOTAL................................................................................. $210,000
=======
</TABLE>
- -----------------
* Estimated.
Item 27. Exhibits.
The exhibits filed as part of this Registration Statement are as
follows:
(a) List of Exhibits:
1.1 Form of Agency Agreement with Hopper Soliday & Co., Inc.*
1.2 Form of Selected Dealers Agreement*
3(i) Articles of Incorporation of Emclaire Financial Corp.*
3(ii) Bylaws of Emclaire Financial Corp.*
4 Specimen Stock Certificate of Emclaire Financial Corp.*
-------------
* Previously filed.
<PAGE>
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered*
10 Purchase and Assumption Agreement Between Mellon Bank, N.A.
as Seller and Farmers National Bank of Emlenton as Purchaser
dated as of May 3, 1996*
11 Statement re: Computation of Per Share Earnings (see
"Selected Financial Data - Summary of Operations" and the
Notes to Consolidated Financial Statements included in the
Prospectus in Part I of this Registration Statement.)*
21 Subsidiaries of the Registrant (See "Business - Subsidiaries"
included in the Prospectus in Part I of this Registration
Statement.)*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in
its opinion filed as Exhibit 5.1)*
23.2 Consent of S.R. Snodgrass, A.C.
24 Power of Attorney (reference is made to the signature page)*
99.1 Stock Order Form
99.2 Marketing Materials
-------------
* Previously filed.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 ("Securities Act");
(ii) Reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
<PAGE>
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Emlenton, Commonwealth of Pennsylvania, on October 16, 1996.
EMCLAIRE FINANCIAL CORPORATION
By: /s/ Ronald L. Ashbaugh
------------------------------------------
Ronald L. Ashbaugh
President
(Duly Authorized Representative)
We the undersigned directors and officers of Emclaire Financial Corp.
(the "Corporation") do hereby severally constitute and appoint John J. Boczar
our true and lawful attorneys and agents, to do any and all things and acts in
our names in the capacities indicated below and to execute all instruments for
us and in our names in the capacities indicated below which said John J. Boczar
may deem necessary or advisable to enable the Corporation to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form SB-2 relating to the offering of the Corporation's common
stock, including specifically but not limited to, power and authority to sign
for us or any of us in our names in the capacities indicated below the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that John J. Boczar
shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on October 16, 1996
/s/ Ronald L. Ashbaugh /s/ John J. Boczar
- ----------------------------- --------------------------------------------
Ronald L. Ashbaugh John J. Boczar
President Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Dr. Clinton R. Coulter /s/ David L. Cox
- ----------------------------- --------------------------------------------
Dr. Clinton R. Coulter David L. Cox
Director Vice President and Director
/s/ Bernadette H. Crooks /s/ George W. Feeman
- ----------------------------- --------------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
/s/ Rodney C. Heeter /s/ Robert L. Hunter
- ----------------------------- --------------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
<PAGE>
SIGNATURES (cont.)
/s/ J. Michael King /s/ John B. Mason
- ----------------------------- --------------------------------------------
J. Michael King John B. Mason
Director Director
/s/ Elizabeth C. Smith
- -----------------------------
Elizabeth C. Smith
Director
<PAGE>
As filed with the Securities and Exchange Commission on October 16, 1996
Registration No. 333-11773
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
EXHIBITS TO
FORM SB-2
Registration Statement
Under the
Securities Act of 1933
EMCLAIRE FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Pennsylvania 6021 25-160691
- --------------------------------------------------------------------------------
(State or Other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
612 Main Street, Box D, Emlenton, Pennsylvania 16373
(412) 867-2311
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
Ronald L. Ashbaugh, President
Emclaire Financial Corp.
612 Main Street, Box D, Emlenton, Pennsylvania 16373
(412) 867-2311
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Gregory A. Gehlmann, Esq.
Michael W. Zarlenga, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS TO FORM SB-2
EXHIBIT DOCUMENT
- ------- --------
<S> <C>
1.1 Form of Agency Agreement with Hopper Soliday & Co., Inc.*
1.2 Form of Selected Dealers Agreement*
3(i) Articles of Incorporation of Emclaire Financial Corp.*
3(ii) Bylaws of Emclaire Financial Corp.*
4 Specimen Stock Certificate of Emclaire Financial Corp.*
5 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered*
10 Purchase and Assumption Agreement Between Mellon Bank, N.A. as Seller and Farmers
National Bank of Emlenton as Purchaser dated as of May 3, 1996*
11 Statement re: Computation of Per Share Earnings (see "Selected Financial Data - Summary
of Operations" and the Notes to Consolidated Financial Statements included in the Prospectus
in Part I of this Registration Statement.)*
21 Subsidiaries of the Registrant (See "Business - Subsidiaries" included in the Prospectus in
Part I of this Registration Statement.)*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinion filed as Exhibit
5)*
23.2 Consent of S.R. Snodgrass, A.C.
24 Power of Attorney (reference is made to the signature page)*
99.1 Stock Order Form
99.2 Marketing Materials
</TABLE>
- -------------
* Previously filed.
<PAGE>
[Letterhead of S.R. Snodgrass, A.C.]
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
333-11773 of Emclaire Financial Corp. on Form SB-2 of our report dated February
16, 1996, except for Note 15, as to which the date is June 20, 1996, appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/S.R. Snodgrass, A.C.
S.R. Snodgrass, A.C.
Wexford, PA
October 11, 1996
EMCLAIRE FINANCIAL CORP.
(HOLDING COMPANY FOR THE FARMERS NATIONAL BANK OF EMLENTON)
STOCK SUBSCRIPTION AGREEMENT
----------------------------
Your Properly Completed Stock Subscription Agreement Must Be Returned To:
Emclaire Financial Corp., 612 Main Street, Emlenton, PA 16373
This Stock Subscription Agreement, properly executed and with the correct
payment, must be received for the Offering Termination Date, which is expected
to be ________________p.m. on __________________, 1996, but may be earlier or as
late as , 1996, at the discretion of the Company, in accordance with provisions
described in the Prospectus.
NUMBER OF SHARES
Fill in the number of shares of Common Stock you wish to purchase and the Total
Purchase Price. The minimum order is 100 shares and the maximum order is 10,000
shares. The purchase price is $13.50 per share.
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. See the registration
guidelines in this package for instructions. Enter the Social Security Number of
Tax I.D. Number of one of the registered owners. Only one number is required.
Indicate the manner in which you wish to take ownership by checking the
appropriate box. If necessary, check "other" and write in such ownerships as
corporation, trust or estate. If stock is purchased for a trust, date of the
agreement and trust title must be included.
PAYMENT
Enclose a check, bank draft or money order made payable to "Emclaire Financial
Corp." in the amount of the Total Purchase Price. All subscription funds
received and accepted by the Company will be deposited into an escrow account at
the Farmers National Bank of Emlenton.
TELEPHONE NUMBERS
Please enter a daytime and an evening telephone number where you may be
contacted in the event that we cannot process your Stock Subscription Agreement
as given.
ACKNOWLEDGEMENT
Please sign and date the Stock Subscription Agreement. When subscribing as a
custodian, corporate officer, etc., please add your signature and title.
Total
Number of Price Per Purchase
Shares Share Price
x 13.50 = $
- ------------ ---------------------
Individual
- ---------------------------------------------- ------
Name(s) in which the stock is to be registered
Joint Tenants WROS
- ---------------------------------------------- ------
Name(s) in which the stock is to be registered
Uniform Gift to Minors
- ---------------------------------------------- ------
Street Address
Other
------ -----------------
- ----------------------------------------------
City State Zip
- ---------------------------------------------- -----------------------------
Social Security or Tax ID Number Daytime Phone
-----------------------------
Evening Phone
*PLEASE READ THE BACK OF THIS DOCUMENT*
<PAGE>
This Stock Subscription Agreement, properly executed and with the current
payment, must be received before the Offering Termination date, which is
expected to be _______________ p.m. on ______________, 1996, but may be earlier
or as late as ________________, 1996, at the discretion of the Bank, in
accordance with provisions described in the Prospectus. This Stock Subscription
Agreement will be deemed receivable upon the date of delivery of the Stock
Subscription Agreement, with payment, to the address set forth on the front of
this page. This Stock Subscription Agreement may be returned by mailing it in
the postage prepaid envelope.
I (We) (hereinafter referred to as the "Undersigned") acknowledge receipt of the
Prospectus and any supplements thereto. The Undersigned understands that, after
receipt by the Company, this Stock Subscription Agreement may not be modified,
withdrawn or revoked without the consent of the Company. The Company has the
right to accept or reject, in whole or in part, this Subscription Agreement
prior to the consummation of the Offering. If this Stock Subscription Agreement
is rejected in whole or in part, the applicable subscription funds will be
promptly returned to the subscriber. This Stock Subscription Agreement is
binding, after acceptance by the Company, upon the heirs, estate, legal
representatives, assigns and successors of the Undersigned and shall survive the
death, disability or dissolution of the Undersigned. The Undersigned agrees not
to transfer or assign the Common Stock except in accordance with all applicable
laws.
The provision in this Stock Subscription Agreement shall be construed and
enforced according t the laws of the State of Pennsylvania. In the event there
is any conflict between the Prospectus and any supplements thereto and this
Stock Subscription Agreement is executed on behalf of a corporation,
partnership, trust or other entity, the Undersigned has been duly authorized to
execute this Stock Subscription Agreement and all other instruments in
connection with the purchase of the Common stock, and the signature of the
Undersigned is binding upon such corporation, partnership, trust or other
entity. The Company retains the right to request the production of an
appropriate certification for said authorization. This Stock Subscription
Agreement constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof and may be amended only in writing executed by the
party to be bound thereby.
NASD AFFILIATION
Under the regulations of the National Association of Securities Dealers, Inc.
("NASD"), certain persons may not be eligible to purchase shares.
If you are an owner, director, officer, partner, agent or employee of a NASD
member firm or an associate or a member of the immediate family of any such
person, please initial at the following line. _____________
If you are a senior officer of a bank, savings and loan institution, insurance
company, registered investment company, registered investment advisory firm or
any other institutional type account; or a person who is employed in the
securities department of any such institution or who otherwise may influence the
buying and/or selling of securities by any of such institutions; or a member of
the immediate family of any such person, please initial at the following line.
_________________
SUBSTITUTE W-9
I (We) am/are not subject to backup withholding either (1) because I (we) am/are
exempt from back-up withholding, (2) I (we) have not been notified that I (we)
am/are subject to back-up withholding as a result of a failure to report all
interest on dividends, or (3) the Internal Revenue Service has notified me (us)
that I (we) am/are no longer subject to back-up withholding. (You must cross out
2 if the IRS notified you that you are currently subject to backup withholding.)
ACKNOWLEDGEMENT
I (WE) ACKNOWLEDGE THAT THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IS
NOT FEDERALLY INSURED AND IS NOT GUARANTEED BY THE FEDERAL GOVERNMENT.
I (we) further certify that I (we) received a Prospectus prior to purchasing the
Common Stock of Emclaire Financial Corp. and acknowledge the terms and
conditions described therein. The Prospectus that I (we) received contains
disclosure concerning the nature of the security being offered and describes the
risks involved in the investment. See "Risk Factors" on pages 1 through 3 of the
Prospectus.
Under the penalties of perjury, I (we) certify that the information contained
herein, including the Social Security Number or Taxpayer Identification Number
given above, is true, correct and complete.
- -------------------------- ---------------------------------------------------
Signature Date Signature (if second signature is required) Date
THIS STOCK SUBSCRIPTION AGREEMENT IS NOT VOID UNLESS SIGNED.
FOR ASSISTANCE, PLEASE CALL THE STOCK INFORMATION CENTER AT (412) 867-2311
<PAGE>
Stock Registration Guidelines
-----------------------------
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we utilize in the issuance of
your stock certificate(s) for the Common Stock. If you have any questions,
please consult your legal advisor
Stock ownership must be registered in one of the following manners:
Individual:
Avoid the use of two initials. Include the first given name, middle initial and
last name of the stockholder. Omit words of limitation that do not affect
ownership rights such as "special account," "single man," "personal property,"
etc.
Joint:
Joint ownership of stock by two or more persons shall be inscribed on the
certificate with one of the following types of ownership. Names should be joined
by "and," do not connect with "or." Omit titles such as "Mrs.," "Dr.," etc.
Joint Tenants - Joint Tenancy with Right of Survivorship and not as Tenants in
Common may be specified to identify two or more owners where ownership is
intended to pass automatically to the surviving tenant(s). Tenants in Common -
Tenants in Common may be specified to identify two or more owners. When stock is
held as tenancy in common, upon the death of one co-tenant, ownership of the
stock will be held by the surviving co-tenant(s) and by the heirs of the
decreased co-tenant. All parties must agree to the transfer or sale of shares
held in this form of ownership.
Uniform Gifts To Minors:
Stock may be held in the name of a custodian for a minor under the Uniform Gifts
to Minors laws of the individual states. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation of custodian
is "CUST," while the description "Uniform Gifts to Minors Act" is abbreviated
"UNIF GIFT MIN ACT." Standard U.S. Postal Service state abbreviations should be
used to describe the appropriate state. For example, stock held by John P. Jones
under the Delaware Uniform Gifts to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF GIFT MIN ACT DE
Fiduciaries:
Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary -
- If an individual, list the first given name, middle initial, and
last name.
- If a corporation, list the corporate title.
- If an individual and a corporation, list the corporation's title
before the individual.
<PAGE>
2. The fiduciary capacity -
- Administrator - Committee - Trustee - Custodian
- Conservator - Executor - Personal Representative
3. The type of document governing the fiduciary relationship. Generally, such
relationships are either under a form of living trust agreement or
pursuant to a court order. Without a document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The date of
the document need not be used in the description of a trust created by a
will.
5. Either of the following:
The name of the maker, donor or testator
or
The name of the beneficiary
Example of Fiduciary Ownership:
John D. Smith, Trustee for Tom A. Smith
Under Agreement Dated 6/9/74
6. The taxpayer identification number if a trust.
This Stock Subscription Agreement is neither an offer to sell nor a solicitation
of an offer to buy securities. The Offering is made only by the Prospectus.
These securities are not bank deposits, are not obligations of, or guaranteed by
any bank, are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency, and involve investment risk,
including the possible loss of principal.
[COVER LETTER FOR INITIAL MAILING]
[Date]
Dear Shareholders and Friends:
We are pleased to announce that Emclaire Financial Corp. (the "Company") is
conducting a common stock offering of up to 200,800 shares. The shares are being
offered to the Company's shareholders, customers, business associates and the
general public. The purchase price is $13.50 per share.
The Company is the holding company for the Farmers National Bank of
Emlenton (the "Bank"), a national banking association. The Bank has seven full
service branch offices in Venango, Clarion and Butler Counties. At June 30,
1996, the Company had total consolidated assets, deposits and stockholders'
equity of $109.4 million, $100.2 million and $9.2 million, respectively.
Please read the enclosed Prospectus carefully. It includes important
financial and other information about the Company and describes the Offering in
detail. To subscribe for shares, please complete the enclosed Stock Subscription
Agreement and submit it, along with full payment of the purchase price, to the
Company in the enclosed postage-paid return envelope, which must be received
before 5:00 p.m. on ________________________.
If you have questions about the Offering, please call the Stock Information
Center at (412) 867-2311 and ask to speak with a representative about the
Emclaire Financial Corp. Stock Offering.
Sincerely,
Ronald L. Ashbaugh
President and Chairman of the Board
RLA/skf
Enclosure
This letter is neither an offer to sell nor a solicitation of an offer to buy
securities. The Offering is made only by the Prospectus. These securities are
not bank deposits, are not obligations of, or guaranteed by any bank, are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency, and involve investment risk, including the possible loss of
principal.
<PAGE>
[COVER LETTER FOR RESPONSE MAILING]
[Date]
Dear Potential Investor:
Thank you for your interest in Emclaire Financial Corporation's (the
"Company") common stock offering of up to 200,800 shares. The shares are being
offered to the Company's shareholders, customers, business associates and the
general public. The purchase price is $13.50 per share.
The Company is the holding company for The Farmers National Bank of
Emlenton (the "Bank"), a national banking association. The Bank has seven full
service branch offices in Venango, Clarion and Butler Counties. At June 30,
1996, the Company had total consolidated assets, deposits and stockholders'
equity of $109.4 million, $100.2 million and $9.2 million, respectively.
Please read the enclosed Prospectus carefully. It includes important
financial and other information about the Company and describes the Offering in
detail. To subscribe for shares, please complete the enclosed Stock Subscription
Agreement and submit it, along with full payment of the purchase price, to the
Company in the enclosed postage-paid return envelope, which must be received
before 5:00 p.m. on _____________________.
If you have any questions about the Offering, please call the Stock
Information Center at (412) 867-2311 and ask to speak with a representative
about the Emclaire Financial Corp. Stock Offering.
Sincerely,
Ronald L. Ashbaugh
President and Chairman of the Board
RLA/skf
Enclosure
This letter is neither an offer to sell nor a solicitation of an offer to buy
securities. The Offering is made only by the Prospectus. These securities are
not bank deposits, are not obligations of, or guaranteed by any bank, are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency, and involve investment risk, including the possible loss of
principal.
<PAGE>
[NEWSPAPERS ADVERTISEMENT]
This announcement is neither an offer sell nor a solicitation of offers to
buy the stock of Emclaire Financial Corp. The offering is made only by the
prospectus which is available upon request.
You are Invited to
Share in the Future of Community Banking
----------------
Emclaire Financial Corp.
(Holding Company for
The Farmers National Bank of Emlenton)
200,800 Shares
Common Stock
$13.50 per Share
----------------
WE ARE NOW OFFERING COMMON STOCK
To learn more about buying shares of Emclaire Financial Corp., please...
Call us at (412) 867-2311
OR
Clip the coupon and mail it to our Stock Information Center
----------------
LOGO
----------------
(Coupon layout)
<PAGE>
[Community Meeting Invitation and Advertisement]
LOGO
(Holding company for The Farmers National Bank of Emlenton)
You are cordially invited to a Community Information Meeting and Reception
-----------------------------------
Please join the Board of Directors and Senior Management Team of
Emclaire Financial Corp. at one of the community information meetings
listed below. We will tell you more about our commitment to
community banking and our stock offering. To reserve a place
for yourself and your friends who may have an interest in becoming
a shareholder of Emclaire Financial Corp.,
please call us at (412) 867-2311.
-----------------------------------
Dates, Times and Locations
-----------------------------------
LOGO
Share in the Future of Community Banking
This announcement is neither an offer to sell nor a solicitation
of offers to buy the stock of Emclaire Financial Corp.
The offering is made only by the prospectus which is
available upon request.
<PAGE>
[Q & A Brochure Cover]
Share in the Future
of Community Banking
----------------------------------
Questions & Answers
About Our Stock Offering
----------------------------------
Logo
(Holding Company for The Farmers National Bank of Emlenton)
------------------------------------
<PAGE>
INTRODUCTION
Emclaire Financial Corp. (the "Company") is the holding company for The Farmers
National Bank of Emlenton.
The Company is raising a maximum of $2.71 million of additional capital by
offering up to 200,080 shares of common stock ("Common Stock").
Some of the most frequently asked questions about the Company and the Offering
are outlined below.
INFORMATION ABOUT EMCLAIRE FINANCIAL CORP.
Q. What is the background of the Company?
A. The Company is a bank holding company headquartered in Emlenton, Pennsylvania
and is the holding company for The Farmers National Bank of Emlenton (the
"Bank"). The Bank has seven full service offices located in Venango, Clarion and
Butler Counties. As of June 30, 1996, the Company had total consolidated assets,
deposits and shareholders' equity of approximately $109.4 million, $100.2
million and $9.2 million, respectively.
The Bank provides a wide range of community banking services for consumers and
small to medium-size companies. Lending is concentrated in residential mortgage
and other real estate loans, commercial and agricultural loans and consumer
loans to local borrowers. The Company's lending and investing activities are
funded principally by deposits obtained through its retail branch office
network.
The Bank's approach is that of a community bank -- development of long-term
customer relationships, personalized service, convenient locations and
convenient hours of operation.
Q. What have been the Company's results of operations?
A. The Company reported net income of approximately $1.172 million for the year
ended December 31, 19956, which represents a return on average assets of 1.10%
and a return on average equity of 13.56%.
For the six months ended June 30, 1996, the Company reported net income of
$501,000, representing an annualized return on average assets of 1.00% and an
annualized return on average equity of 10.86%.
<PAGE>
THE OFFERING
GENERAL
The Company is offering up to 200,800 shares of Common Stock in an Offering,
through which the Company's shareholders, customers and the general public may
subscribe for shares.
The Offering will conclude on _________________________, unless the Company
extends the Offering for up to an additional _______ days. The Company may, in
its sole discretion, increase the number of shares to 230,800 shares in the
event shares are oversubscribed in the Offering. The additional shares are
referred to as the "Over-allotment Reserve."
Q. How will the net proceeds of the Offerings be used?
A. The net proceeds to the Company from the Offerings are estimated to be $2.5
million, if all 200,800 shares are sold. The Company intends to contribute the
net proceeds to the Bank as additional capital to support the growth and
expansion of the Bank.
Q. How many shares are being offered, and is there a minimum number of shares
that must be subscribed for by investors in order for the Company to complete
the Offerings and receive proceeds?
A. The Company is offering up to 200,800 shares (excluding the Over-allotment
Reserve) of Common Stock. There is no minimum of shares which must be subscribed
for in order for the Offering to close and proceeds to be distributed to the
Company. All subscriptions are irrevocable upon receipt by the Company,
regardless of the aggregate number of shares which may be subscribed for by
investors and even if the market price of the Common Stock falls below the
purchase price during the period of the Offering. In the Offering, the minimum
number of shares that may be subscribed for per investor is 100 shares and the
maximum number per investor is 10,000 shares, unless waived by the Company's
Board of Directors.
PRICING
Q. What is the Offering Price per share of the Common Stock in the Offering and
how was the Offering Price determined?
A. The Offering Price per share is $13.50. The Offering Price of the Common
Stock has been determined by the Board of Directors of the Company after taking
into account various factors including prevailing market conditions, the
Company's earnings and current financial position, the Company's prospects,
recent trading history of the Common Stock, current stockholders' equity per
share and the value of similar securities. The Offering Price does not
necessarily reflect the price at which the Common Stock may trade following the
Offering.
<PAGE>
Q. Must I pay a commission when buying the shares?
A. No brokerage commission or fee will be charged to subscribers for the
purchase of Common Stock in the Offering. The Company is responsible for paying
all of the expenses of the Offering.
ORDERING
Q. How do I pay for the Common Stock?
A. Subscribers must complete and submit to the Company the Stock Subscription
Agreement. Subscribers should make payment in the amount of the aggregate
purchase price, by check payable to "Emclaire Financial Corp.". Payment for
shares of Common Stock may be made (i) if delivered in person, (ii) by check or
money order payable to the Company, or (iii) by wire transfer of funds to the
escrow account maintained by the Company for such purposes at The Farmers
National Bank of Emlenton, Account No. ________________; ABA No. ____________.
For orders or subscriptions of $25,000 or more, payments must be made by wire
transfer, certified check, cashier's check or money order. An executed Stock
Subscription Agreement, once received by the Company, may not be modified,
amended or rescinded without the consent of the Company. All funds received in
payment of the purchase price will be held by the Company in a non-interest
bearing escrow account at the Bank. Remittance to the Company may be made in the
enclosed postage paid return envelope.
Q. What are the purchase limitations?
A. Each investor in the Offering is required to subscribe for a minimum of 100
shares. The maximum subscription for each investor in the Offering is 10,000
shares, unless waived by the Company's Board of Directors. The Company reserves
the right to accept or reject, in whole or in part, any subscription in the
Offering.
Q. How do I purchase common stock through an IRA?
A. You may establish a self-directed IRA through a broker-dealer, or another
fiduciary of your choosing. Call the Stock Information Center and speak with a
representative for assistance with IRA orders. IRA transactions can take some
time, so contact the Stock Information Center early.
TIMING
Q. When is the Offering expected to conclude?
A. The Offering is expected to terminate at 5:00 P.M. on ___________________,
unless extended by the Company for up to an additional 30 days. The Company
reserves the right to terminate the Offering, without prior notice, at any time
after ____________________.
<PAGE>
Q. When will I receive my stock certificate?
A. Stock certificates for shares subscribed for and accepted by the Closing Date
are expected to be issued within 15 days after such date.
AFTERMARKET
Q. How is the Company's stock traded?
A. Prior to the Offering, there has been no public market for the Common Stock
of the Company. Although there can be no assurance, the Company expects that,
following the Offering, the Common Stock will be traded in the over-the-counter
market ("OTC") through the OTS "Electronic Bulletin Board." There can be no
assurance, however, that an active trading market will develop or, if developed,
will be sustained following the Offering. Hopper Soliday has advised the Company
that, upon completion of the Offering, it intends to make a market in the Common
Stock, subject to market conditions.
Q. Will dividends be paid on the common stock?
A. The Company has paid cash dividends every year since its formation in 1989.
It is the present intention of the Board of Directors to continue to pay regular
quarterly cash dividends.
The Company paid annual dividends of 0.55 cents per share in 1995 (includes a
$0.15 per share special dividend). The Company paid quarterly dividends of $0.10
in the first quarter of 1996 and $0.11 per share in the second and third
quarters of 1996.
Payments of dividends is dependent upon a number of factors considered by the
Board of Directors, including certain regulatory considerations, operating
results, financial condition and general business conditions.
Q. In the future, how can I purchase additional shares or sell shares?
A. Shares may be traded through any stockbroker. A commission may be charged for
trades through a stockbroker. Hopper Soliday intends to make a market in the
stock after the offering, subject to market conditions.
FURTHER INFORMATION
Q. How can I get additional information about the Offering?
A. You may obtain additional information about the Offerings by contacting the
Stock Information Center at (412) 867-2311.
This Questions and Answers Pamphlet is neither an offer to sell nor a
solicitation of an offer to buy securities. The Offering is made only by the
Prospectus. The shares of Common Stock are not bank deposits, are not
obligations of, or guaranteed by the bank, are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency, and
involve investment risk, including the possible loss of principal. Copies of the
Prospectus may be obtained by calling the Stock Information Center at (412)
867-2311. See the "Special Risk Considerations" section of the Prospectus for a
discussion of certain matters that should be considered carefully by prospective
purchasers of the Common Stock.
