SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB405
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 NO FEE REQUIRED For the fiscal year ended December 31, 1997,
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period
from to .
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Commission File No. 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1606091
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(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
612 Main Street, Box D, Emlenton, Pennsylvania 16373
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (724) 867-2311
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.25 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $10,119,000
As of March 17, 1998, there were issued and outstanding 1,081,453
shares of the registrant's Common Stock.
The Registrant's Common Stock trades on the OTC Electronic Bulletin
Board under the symbol "EMCF." The aggregate market value of the Common Stock
held by non-affiliates of the registrant, based on the last price the
registrant's Common Stock was sold on February 11, 1998, was $15,011,592 ($18.25
per share based on 822,553 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one) YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1997. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Description of Business
General
Emclaire Financial Corp. ("Company") was incorporated in Pennsylvania in 1989 to
own and control all of the capital stock of The Farmers National Bank of
Emlenton ("Bank"). The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956 ("BHCA"), as amended. The Company has no
employees other than executive officers whom do not receive compensation for
serving in such capacity. Because the Company has not engaged in any significant
business to date, almost entirely all of the business conducted by the Company
on a consolidated basis is conducted through the Bank, its wholly owned
subsidiary.
The Bank was organized in 1900 as a national banking association, and operates
under the supervision of the Office of the Comptroller of the Currency ("OCC").
The Bank operated from a single office until 1978 when it opened its first
branch office in Eau Claire. A second branch was established in Clarion in 1985.
During 1991, the Bank acquired the East Brady and Emlenton branch operations of
Mellon Bank. The Emlenton office of Mellon Bank was closed and donated to the
Borough of Emlenton while the deposit accounts were transferred to the existing
Emlenton office. In 1996, the fifth and sixth offices were established in Bon
Aire Plaza in Butler, and in a grocery store located in Knox. In September 1996,
the Knox branch operation of Mellon Bank was acquired.
The Bank operates as a full-service community bank, offering a variety of
financial services to meet the needs of its markets served. Those services
include accepting time and demand deposits from the general public and together
with other funds, using the proceeds to originate secured and unsecured
commercial and consumer loans, finance commercial transactions and provide
construction and mortgage loans, as well as home equity and personal lines of
credit. In addition funds are also used to purchase investment and
mortgage-backed securities.
Lending Activities
General. The principal lending activities of the Bank are the origination of
residential mortgage loans, home equity loans, commercial and commercial real
estate loans, and installment loans. Generally, loans are originated in the
Bank's primary market area. For a description of the Bank's loan portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Stockholders ("Annual Report")
included as Exhibit 13 and incorporated herein by reference.
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured
by one-to-four family residences located in the Bank's primary lending area.
Typically such residences are single family owner occupied units. The Bank is an
approved, qualified lender for the Federal Home Loan Mortgage Corporation
("FHLMC"). As a result, the Bank may sell loans to and service loans for the
FHLMC. While the Bank has made no such sales to date, it anticipates the ability
to sell loans to the FHLMC will allow it to minimize the interest rate risk
associated with longer term fixed rate mortgages.
Home Equity Loans. The Bank originates home equity loans secured by
single-family residences. These loans may be either a single advance fixed rate
loan with a term of up to 15 years, or a variable rate revolving line of credit.
These loans are made only on owner-occupied single-family residences.
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Commercial and Commercial Real Estate Loans. Commercial lending constitutes a
significant portion of the Bank's lending activities comprising a combined total
of 30.5% of the total loan portfolio at December 31, 1997. Commercial real
estate loans generally consist of loans granted for commercial purposes secured
by commercial or other nonresidential real estate. Commercial loans consist of
secured and unsecured loans for such items as capital assets, inventory,
operating funds, and other commercial purposes.
Consumer Loans. Consumer loans generally consist of fixed rate term loans for
automobile purchases, home improvements not secured by real estate, capital, and
other personal expenditures. In addition, the Bank funds education loans under
various government guaranteed student loan programs. These loans are serviced
for the Bank by a third party. The Bank also offers unsecured revolving personal
lines of credit and overdraft protection
Loans to One Borrower. National banks are subject to limits on the amount of
credit which they can extend to one borrower. Under current law, loans to one
borrower are limited to an amount equal to 15% of unimpaired capital and surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and surplus if the loan is secured by readily marketable collateral. At
December 31, 1997, the Bank's loans-to-one borrower limit based upon 15% of
unimpaired capital was $1.9 million. At December 31, 1997, the Bank's largest
aggregation of loans to one borrower was approximately $744,000 of loans secured
by commercial and residential rental properties. At December 31, 1997, all of
these loans were performing in accordance with their terms.
Investment Portfolio
General. The Bank maintains an investment portfolio of securities such as U.S.
government and agency securities, state and municipal debt obligations,
corporate notes and bonds, and to a lesser extent, mortgage-backed securities.
Management generally maintains an investment portfolio with relatively short
maturities to minimize overall interest rate risk.
Investment decisions are made within policy guidelines established by the Board
of Directors. This policy is aimed at maintaining a diversified investment
portfolio, which complements the overall asset/liability and liquidity
objectives of the Bank, while limiting the related credit risk to an acceptable
level. For a description of the Company's investment portfolio see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report incorporated herein by reference.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
investing activities. Secondary sources of funds are derived from loan
repayments and investment maturities. Loan repayments can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates and general market conditions. The Bank also has access to
funds through credit facilities available from the Federal Home Loan Bank
("FHLB") and through its primary correspondent bank. In addition, the Bank can
obtain advances from the Federal Reserve Bank discount window. For a description
of the Bank's sources of funds see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report incorporated
herein by reference.
Deposits. The Bank offers a wide variety of retail deposit account products to
both consumer and commercial deposit customers, including time deposits,
non-interest bearing and interest bearing demand deposit accounts, savings
deposits, and money market accounts.
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Deposit products are promoted in periodic newspaper and radio advertisements,
along with notices provided in customer account statements. The Bank's market
strategy is based on its reputation as a community bank that provides quality
products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. Interest rates on deposits are reviewed weekly by management considering a
number of factors including (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Bank, a national association.
As of December 31, 1997, the Bank had no subsidiaries.
Personnel
At December 31, 1997, the Bank had 75 full time equivalent employees. None of
its employees are represented by a collective bargaining unit. The Bank believes
its relationship with its employees to be satisfactory.
Competition
The Bank competes with regional and other community commercial banks, thrift
institutions, credit unions, and non financial institution entities such as
mutual funds and securities brokers, for deposit customers, in its primary
market area of Venango, Clarion, Butler and northern Armstrong Counties. In
addition to competing financial institutions, the Bank also competes with
mortgage brokers, mortgage banking companies and consumer finance companies for
loan customers.
The Bank competes for deposit funds by offering a variety of deposit products,
quality personal service and competitive interest rates. In addition, the Bank
offers a number of other services including but not limited to, safe deposit
boxes, night depositories, debit cards, automated teller machines, wire
transfers and direct deposit.
The Bank competes for loans by charging competitive interest rates and nominal
fees, along with providing efficient and comprehensive service to loan
customers.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both federal
and state law. Set forth below is a summary description of certain provisions of
certain laws which relate to the regulation of the Company and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
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Regulation - The Company
The Company, as a registered bank holding company, is subject to regulation
under the BHCA. The Company is required to file quarterly reports and annual
reports with the Federal Reserve Board ("FRB") and such additional information
as the FRB may require pursuant to the BHCA. The FRB may conduct examinations of
the Company and its subsidiaries.
The FRB may require that the Company terminate an activity or terminate control
of or liquidate or divest certain subsidiaries or affiliates when the FRB
believes the activity or the control of the subsidiary or affiliate constitutes
a significant risk to the financial safety, soundness, or stability of any of
its banking subsidiaries. The FRB also has the authority to regulate provisions
of certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances, the
Company must file written notice and obtain approval from the FRB prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the FRB, a bank holding company and
its nonbanking subsidiaries are prohibited from requiring certain tie-in
arrangements in connection with any extension of credit, lease, or sale of
property or furnishing of services. Further, the Company is required by the FRB
to maintain certain levels of capital. Because the Company has less than $150
million in assets on a consolidated basis, the capital levels of the Bank are
deemed by the FRB to be the capital levels of the Company. For additional
information on the capital levels of the Bank, see "- Regulation - The Bank";
and "Management's Discussion and Analysis - Liquidity and Capital Resources -
Capital Resources" in the Annual Report incorporated herein by reference.
The Company is required to obtain the prior approval of the FRB for the
acquisition of more than 5% of the outstanding shares of any class of voting
securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the FRB is also required for the merger or
consolidation of the Company and another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or furnishing services to
its subsidiaries. However, the Company, subject to the prior approval of the
FRB, may engage in any activities, or acquire shares of companies engaged in
activities that are deemed by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Bank holding companies and their subsidiary banks are subject to the provisions
of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms
and the provisions of the CRA, the Bank's record in meeting the credit needs of
the community served by the Bank, including low- and moderate-income
neighborhoods, is generally annually assessed by the OCC. When a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. At March 6, 1996, the Bank was rated "Satisfactory" with
respect to the CRA.
Under FRB regulations, a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the FRB's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding
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company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the FRB to be
an unsafe and unsound banking practice or a violation of the FRB's regulations
or both. This doctrine has become known as the "source of strength" doctrine.
The validity of the source of strength doctrine has been and is likely to
continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
Regulation - The Bank
General - The Bank is subject to supervision and examination by the OCC and to
certain regulations of the FDIC, and the FHLB. The Bank is also subject to
various requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types,
amount and terms and conditions of loans that may be granted and limitations on
the types of investments that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect the operations of the
Bank.
Dividend Restrictions - Dividends from the Bank constitute the principal source
of income to the Company. The Bank is subject to various statutory and
regulatory restrictions on its ability to pay dividends to the Company. Under
such restrictions, the amount available for payment of dividends to the Company
by the Bank totaled approximately $1.5 million at December 31, 1997. In
addition, the OCC has the authority to prohibit the Bank from paying dividends,
depending upon the Bank's financial condition, if such payment is deemed to
constitute an unsafe or unsound practice. The ability of the Bank to pay
dividends in the future is presently, and could be further, influenced by bank
regulatory and supervisory policies.
Affiliate Transactions - The Bank is subject to federal laws that limit the
transactions by subsidiary banks to or on behalf of their parent company and to
or on behalf of any nonbank subsidiaries. Such transactions by a subsidiary bank
to its parent company or to any nonbank subsidiary are limited to 10 percent of
a bank subsidiary's capital and surplus and, with respect to such parent company
and all such nonbank subsidiaries, to an aggregate of 20 percent of such bank
subsidiary's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also prohibits banks from purchasing "low quality" assets
from affiliates.
Insurance Assessments - Deposits of the Bank are insured by the BIF of the FDIC
and are subject to FDIC insurance assessments. The amount of FDIC assessments
paid by the individual insured depository institution is based on their relative
risk as measured by regulatory capital ratios and certain other factors. During
1995, the FDIC significantly reduced premium rates assessed on deposits insured
by the BIF. Under the current regulations, the Bank is assessed a premium on
BIF-insured deposits.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the Bank paid, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 6.4 basis points. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
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chartered as savings associations at that time. Should the insurance funds be
merged before January 1, 2000, the rate paid by all members of this new fund to
retire the Fico Bonds would be equal.
Enforcement Powers of Federal Banking Agencies - Federal Banking agencies
possess broad powers to take corrective and other supervisory action deemed
appropriate for an insured depository institution and its holding company. The
extent of these powers depends on whether the institution in question is
considered "well capitalized", "adequately capitalized", "under capitalized" or
"critically undercapitalized". At December 31, 1997, the Bank exceeded the
required ratios for classification as "well capitalized". The classification of
depository institutions is primarily for the purpose of applying the federal
banking agencies' prompt corrective action and other supervisory powers and is
not intended to be, and should not be interpreted as, a representation of the
overall financial condition or prospects of any financial institution.
The agencies' prompt corrective action powers can include, among other things,
requiring an insured depository institution to adopt a capital restoration plan
which cannot be approved unless guaranteed by the institution's parent company;
placing limits on asset growth and restrictions on activities, including
restrictions on transactions with affiliates; restricting the interest rate the
institution may pay on deposits; prohibiting the payment of principal or
interest on subordinated debt, prohibiting the holding company from making
capital distributions without prior regulatory approval; and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Under the risk-based capital guidelines applicable to the Company and the Bank,
the minimum guideline for the ratio of total capital to risk-weighted assets
(including certain off-balance-sheet activities) is 8.00 percent. At least half
of the total capital must be "Tier 1" or core capital, which primarily includes
common stockholders' equity and qualifying preferred stock, less goodwill and
other disallowed intangibles. "Tier 2" or supplementary capital includes, among
other items, certain cumulative and limited-life preferred stock, qualifying
subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio (Tier 1
capital to total adjusted average assets) guidelines providing for a minimum
leverage ratio of 3 percent for bank holding companies and banks meeting certain
specified criteria, including that such institutions have the highest regulatory
examination rating and are not contemplating significant growth or expansion.
Institutions not meeting these criteria are expected to maintain a ratio which
exceeds the 3 percent minimum by at least 100 to 200 basis points. The federal
bank regulatory agencies may, however, set higher capital requirements when
particular circumstances warrant. Under federal banking laws, failure to meet
the minimum capital requirements could subject a bank to a variety of
enforcement remedies available to federal bank regulatory agencies.
At December 31, 1997, the Bank's respective total and Tier 1 risk-based capital
ratios and leverage ratios exceeded the minimum regulatory requirements. See
Note 14 in the audited consolidated financial statements included in the Annual
Report and incorporated herein by reference.
Legislative Proposals and Reforms
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by U.S. Congress.
In the last Congress, such proposals included legislation to revise the BHCA to
expand permissible activities for banks, principally to facilitate the
convergence of commercial and investment banking. Certain proposals also sought
to expand insurance activities of banks.
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It is unclear whether any of these proposals, or any form of them, will be
reintroduced in the current Congress and become law. Consequently, it is not
possible to determine what effect, if any, they may have on the Company and the
Bank.
Item 2. Description of Property
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(a) Properties.
The Company owns no real property but utilizes the main office of the Bank. The
Company's and the Bank's executive offices are located at 612 Main Street,
Emlenton, Pennsylvania. The Company pays no rent or other form of consideration
for the use of this facility. The Bank has seven offices located in Venango,
Clarion, and Butler counties, Pennsylvania. The Bank's total investment in
office property and equipment was $4.0 million with a net book value of $2.6
million at December 31, 1997.
<TABLE>
<CAPTION>
Main Office Eau Claire Office Clarion Office
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<S> <C> <C> <C>
612 Main Street 207 South Washington Street Sixth and Wood Streets
Emlenton, Pennsylvania Eau Claire, Pennsylvania Clarion, Pennsylvania
Venango County Butler County Clarion County
East Brady Office Bon Aire Office Knox 338 Office Knox Main Street Office
----------------- --------------- --------------- -----------------------
Broad and Brady Streets 1101 North Main Street Rt. 338 South Main and State Streets
East Brady, Pennsylvania Butler, Pennsylvania Knox, Pennsylvania Knox, Pennsylvania
Clarion County Butler County Clarion County Clarion County
</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 is located in
a supermarket, and is operated under a 5 year lease with three (3) options to
renew. The Bank also maintains a remote ATM facility located in a supermarket in
East Brady.
In August 1997, the Bank began construction of a Data Processing Center on a lot
previously used for employee parking. Refer to Note 7 in the audited
consolidated financial statements included in the Annual Report and incorporated
herein by reference.
In February, 1998, the Bank entered into a lease to establish its eighth branch
office in the Clarion Mall. The lease has a five year term with two (2) options
to renew. The office is expected to commence operations late in the first
quarter of 1998.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's investment
policies and any regulatory or Board of Directors' percentage of assets
limitations regarding certain investments. All of the Bank's investment policies
are reviewed and approved by the Board of Directors of the Bank, and such
policies, subject to regulatory restrictions (if any), can be changed without a
vote of stockholders. The Bank's investments are primarily acquired to produce
income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities," "Item 1. Business - Regulation of the Bank,"
and "Item 2. Description of Property - (a) Properties" above.
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(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities" and "Item 1. Business - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities,"
"Item 1. Business - Regulation of the Bank," and "Item 1.
Business - Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to stockholders for a vote during the quarter ended
December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained under the section captioned "Common Stock Information"
in the Company's Annual Report for the fiscal year ended December 31, 1997, is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The required information is contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report and is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Company's consolidated financial statements required herein are contained in
the Annual Report and are incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not Applicable.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Principal Beneficial
Owners of the Corporation's Common Stock" and "Information as to Nominees,
Directors and Executive Officers" in the Company's definitive proxy statement
for the Company's Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Information as to
Nominees, Directors and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Information as to Nominees, Directors and Executive Officers"
in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits are either attached as part of this Report or incorporated herein
by reference.
<TABLE>
<CAPTION>
<S> <C>
3.1 Articles of Incorporation of Emclaire Financial Corp. *
3.2 Bylaws of Emclaire Financial Corp. *
4 Specimen Stock Certificate of Emclaire Financial Corp.
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10 Form of Change in Control Agreement between Registrant and three (3) executive
officers. **
11 Statement regarding computation of earnings per share (see Note 1 to the Notes to
Consolidated Financial Statements in the Annual Report).
13 Annual Report to Stockholders for the fiscal year ended December 31, 1997.
21 Subsidiaries of the Registrant (see information contained herein under "Business -
Subsidiary Activity").
27 Financial Data Schedule ***
(b) Reports on Form 8-K.
None
</TABLE>
- -------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, as amended, (File No. 333-11773) declared effective by the SEC
on October 25, 1996
** Incorporated by reference to the Registrant's Annual Report on 10-KSB for
the year ended December 31, 1996.
*** Only in electronic filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP.
Dated: March 18, 1998 By: /s/ David L. Cox
-----------------
David L. Cox
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ David L. Cox By: /s/ John J. Boczar
-------------------------------------- -------------------------------------
David L. Cox John J. Boczar
President, Chief Executive Officer, and Director Treasurer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Ronald L. Ashbaugh By: /s/Brian C. McCarrier
-------------------------------------- -------------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Bernadette H. Crooks By: /s/ George W. Freeman
-------------------------------------- -------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Rodney C. Heeter By: /s/ Robert L. Hunter
-------------------------------------- -------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ J. Michael King By: /s/ John B. Mason
-------------------------------------- -------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/
--------------------------------------
Elizabeth C. Smith
Director
Date:
</TABLE>
EXHIBIT 4
Specimen Stock Certificate of Emlciare Financial Corp.
<PAGE>
================================================================================
COMMON STOCK INCORPORATED UNDER THE CUSIP 290828 10 2
CERTIFICATE NO. LAWS OF THE COMMONWEALTH
OF PENNSYLVANIA
EMCLAIRE FINANCIAL CORP.
EMLENTON, PENNSYLVANIA SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
Is The Owner Of:
shares of the Common Stock, $1.25 par value of Emclaire Financial Corp.
hereinafter called the Corporation, transferable only on the books of the
Corporation, by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
The amount of the Common Stock of the Corporation is set forth on the
books of the Corporation and the par value of the shares of Common Stock of the
Corporation is set forth in the Articles of Incorporation of the Corporation, as
amended or to be amended hereafter, which Articles of Incorporation and any and
all amendments thereof are on file at the office of the Corporation and are also
on file at the office of the Commonwealth of Pennsylvania Department of State
and are hereby expressly incorporated herein by reference and to all of which
the holder, by acceptance hereof, hereby agrees and assents.
This certificate is not valid unless countersigned and registered by
the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, Emclaire Financial Corp. has caused the facsimile
signatures of its duly authorized officers and has caused a facsimile of its
Corporate Seal to be hereunto affixed.
DATED:
- ------------------------------------ ---------------------------------
SECRETARY PRESIDENT
SEAL
Incorporated 1989
================================================================================
<PAGE>
The Board of Directors of Emclaire Financial Corp. (the "Corporation")
is authorized by resolution(s), from time to time adopted, to provide for the
issuance of preferred stock and to fix and state the voting powers, preferences
and relative, participating, optional, or other special rights of the shares of
each such series and the qualifications, limitations, and restrictions thereof.
The Corporation will furnish to any shareholder upon request and without charge
a full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively
voted in the election of directors of the Corporation. The shares represented by
this certificate may not be cumulatively voted in the election of directors of
the Corporation. The Corporation's Articles also include a provision the general
effect of which is to require an affirmative vote of the holders of 80% of the
outstanding common shares of the Corporation to approve any merger,
consolidation, liquidation, or dissolution of the Corporation, or any action
that would result in the sale or other disposition of all, or substantially all,
of the assets of the Corporation. The affirmative vote of 80% of the outstanding
shares of common stock of the Corporation is required to amend this provision of
the Articles.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF TRANS MIN ACT - ________Custodian_________
(Cus) (Minor)
TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act
JT TEN - as joint tenants with right of --------------------------
survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received _______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the Common Stock represented by the within Certificate and do hereby
irrevocably constitute and appoint ____________________________________ Attorney
________________________________________________________________________________
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________ In presence of:
------------------------------------
NOTICE: The signatures to this assignment must correspond with the name
as written upon the face of the certificate, in every particular, without
alteration or enlargement or any change whatever.
The signature(s) of the assignor(s) must be guaranteed hereon by a
participant in either the Securities Transfer Agent's Medallion Program (STAMP),
the Stock Exchange Medallion (SEMP), or the New York Stock Exchange Medallion
Program (MSP).
Countersigned and Registered:
Transfer Agent and Registrar
By: _______________________________
Authorized Signature
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended December 31, 1997
<PAGE>
The Cover
Located in Clarion and Forest counties along the Clarion River, Cook Forest
consists of approximately 7,500 acres of natural forest land. The area that
became known as Cook Forest was originally settled by John Cook in the late
1820s. The family operated lumber and boat businesses which under the guidance
of Anthony Wayne Cook, grandson of John Cook, had procured timberlands as far
away as Oregon and Washington by the early 1900s.
Cook Forest is the home to eastern white pine trees whose straight, resilient
trunks were used as masts for British ships during the 1700's. During the early
to mid-1800's, the lightweight and workable pine timber was prized by settlers.
Though small sections of the forest were selectively logged in the 1800s and
early 1900s, Anthony Wayne Cook and other family members preserved large areas
of the forest. By 1911, the idea of creating a public park from the forest was
presented to public officials.
In 1928, after years of political wrangling and private fund raising, Cook
Forest became the first forest land acquired by the Commonwealth of Pennsylvania
for the purpose of preserving a natural landmark. In 1969, the Forest Cathedral
area was designated a National Natural Landmark by the National Park Service,
U.S. Department of the Interior.
Photograph: Old-growth eastern white pine canopy
photographed over the Forest Cathedral of The Cook
Forest from the top of an ancient eastern hemlock.
Acknowledgment: The photograph was reproduced from
The Cook Forest: An Island in Time, photographed
and written by Anthony E. Cook, grandson of Anthony
Wayne Cook. The photograph and excerpts from The
Cook Forest: An Island in Time, are used courtesy
of the author.
<PAGE>
TABLE OF CONTENTS
President's letter 1
Selected Financial Data 2
Consolidated Financial Statements 3-6
Notes to Consolidated Financial Statements 7-22
Report of Independent Auditors 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations 24-35
Common Stock Information 35
<PAGE>
Dear stockholders and friends:
The past year, 1997, has been dedicated to rebuilding income from the expansion
experienced in 1996. We were able to take advantage of the new market
opportunities in Knox and Butler to increase our customer relationships. Our
loan portfolio increased by an impressive 26% and our deposits increased by 3%,
giving our bank total loans and deposits, as of year end 1997, of $86.1 million
and $117.7 million, respectively. Our loan to deposit ratio increased from 59%
to 72% during 1997. This helped increase net interest income by 22% and offset
certain costs associated with the previously mentioned expansion. Net income
increased by 27% from $981 thousand in 1996 to $1,244 thousand in 1997, and our
earnings per share remained at $1.15.
Although the year was dedicated to absorbing expansion costs, we do not believe
in remaining status quo in the future. To this end, we decided to expand our
data processing facility to prepare for the future of our Bank. In August we
broke ground on a new data processing center in downtown Emlenton. When
completed in April of 1998, this center will house our bookkeeping, proof,
computer, and customer support departments. We also began plans for our eighth
branch office to be located in the Clarion Mall and to be opened in March of
1998. With the opening of this office, we will provide expanded service to our
customers in Clarion and also offer the convenience of our first MAC machine in
Clarion. We are proud of our Bank and our efforts to expand our markets and
philosophy of friendly community banking.
During 1997 we offered our customers the ability to access their checking
accounts for purchases with the new debit card. We chose the MasterMoney(TM)
card to enable our customers to make purchases at 14 million stores and other
locations worldwide, wherever MasterCard(R) is accepted. My daughter, Amy, spent
five months in Kenya, Africa, and she was able to access her checking account in
Emlenton, Pennsylvania, to make purchases or to receive cash. The technology is
available to make small community banks like ours competitive, and with the
added personal hometown service we are able to provide, the future of community
banks, such as ours, remains bright.
The effects of the 1996 stock sale and subsequent quoting of Emclaire common
stock on the OTC Bulletin Board provided our shareholders additional liquidity
for their shares in 1997. As many of our long-time shareholders are aware, our
stock was very difficult to purchase in the past. Although it is still not
traded on a daily basis, trading has been more active in 1997 than in past
years. We were able to see trades in each quarter of 1997, and as of year end
our stock price stood at $17.00 per share. We continue to pursue a more active
market of our stock and we were able to increase the shares outstanding by
paying a 5% stock dividend in December. Shareholders remain a driving force of
the decisions of management and the Board of Directors.
During the final quarter of 1997, we revisited our strategic plan and developed
the direction for our bank over the next five years. We believe that customer
service and offering the right type of products are instrumental to our success
in the future. We also feel our employees are key to making our Bank succeed.
All employees are to be commended on the goals we have reached over the past
year in loan and income growth. Looking towards the future, we also realize how
important the problem of year 2000 becomes to our institution. We have started
an aggressive program of addressing this problem and continue to proceed on an
ongoing basis. The reputation and well being of our bank is at risk if we are
not prepared for the change of the century, and we do not have the ability to
push back the dead line of December 31, 1999. The Board of Directors and
management are committed to have all systems performing before, during, and
after January 1, 2000.
This year our annual meeting will be held May 20, 1998, at our new data
processing center, beside the post office, in Emlenton. I would encourage all
shareholders to attend, not only to express their views, but also to tour this
new facility. We are holding the meeting at 7:00 p.m., and it affords you as
shareholders the opportunity to meet and share in discussion with the Board of
Directors, officers, and employees of your company.
Sincerely,
/s/David L. Cox
- ---------------
David L. Cox
President and Chief Executive Officer
<PAGE>
EMCLAIRE FINANCIAL CORP.
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest income $ 9,523 $ 8,098 $ 7,437 $ 6,751 $ 6,772
Interest expense 3,727 3,352 2,986 2,573 2,651
------------- ------------- -------------- ------------- -------------
Net interest income 5,796 4,746 4,451 4,178 4,121
Provision for loan losses 220 120 143 132 180
------------- ------------- -------------- ------------- -------------
Net interest income after
provision for loan losses 5,576 4,626 4,308 4,046 3,941
Other income 596 427 389 384 301
Other expense 4,382 3,636 3,005 2,899 2,780
------------- ------------- -------------- ------------- -------------
Income before income taxes and
cumulative effect adjustment 1,790 1,417 1,692 1,531 1,462
Applicable income tax expense 546 436 520 454 450
------------- ------------- -------------- ------------- -------------
Net income before cumulative effect adjustment 1,244 981 1,172 1,077 1,012
Cumulative effect adjustment - - - - 31
------------- ------------- -------------- ------------- -------------
NET INCOME $ 1,244 $ 981 $ 1,172 $ 1,077 $ 1,043
============= ============= ============== ============= =============
PER SHARE DATA (1) Earnings per share:
Prior to cumulative effect adjustment $ 1.15 $ 1.15 $ 1.40 $ 1.28 $ 1.20
Cumulative effect adjustment
- - - - .04
============= ============= ============== ============= =============
Earnings per share $ 1.15 $ 1.15 $ 1.40 $ 1.28 $ 1.24
============= ============= ============== ============= =============
Dividends paid (1) $ .44 $ .41 $ .43 $ .38 $ .36
Book value per share at period end (1) $ 12.48 $ 11.68 $ 10.76 $ 9.72 $ 8.81
Average number of shares outstanding (1) 1,081,453 852,403 839,160 839,160 839,160
STATEMENT OF CONDITION STATISTICS
(At end of period)
Assets $ 133,956 $ 128,002 $ 98,599 $ 96,714 $ 94,774
Deposits 117,655 114,725 88,944 87,986 86,996
Loans 86,144 68,428 64,322 64,086 61,378
Allowance for loan losses 874 733 687 688 639
Federal funds sold
- 3,500 2,500 900 3,350
Investment securities
38,034 46,483 26,361 25,436 23,180
Stockholders' equity 13,498 12,631 9,032 8,155 7,397
SIGNIFICANT RATIOS
Return on average equity 9.57 % 10.33 % 13.56 % 13.80 % 14.69 %
Return on average assets .96 .89 1.20 1.12 1.11
Net yield on earning assets 4.87 4.68 4.97 4.81 4.80
Net loans as a percent of deposits 72.47 59.01 71.55 72.05 69.82
Equity to assets at period end 10.08 9.87 9.16 8.43 7.80
Earning average assets to total assets 93.10 93.63 94.11 92.84 92.62
Average interest bearing liabilities to assets 74.71 77.02 77.26 78.36 79.84
Dividends as a percent of net income 38.26 35.65 30.71 29.69 29.03
Allowance for loan losses to total loans 1.01 1.07 1.07 1.07 1.04
Full time equivalent employees 75 74 52 47 47
Banking offices 7 7 4 4 4
</TABLE>
(1) - Adjusted for a 5% stock dividend in 1997 and a 4-for1 stock split in 1996.
2
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,975 $ 4,742
Federal funds sold -- 3,500
Investment securities (Note 4):
Available for sale 31,977 36,208
Held to maturity (estimated market value
of $6,053 and $10,246) 6,057 10,275
Loans (Note 5) 86,144 68,428
Less allowance for loan losses (Note 6) 874 733
----------- -----------
Net loans 85,270 67,695
Premises and equipment (Note 7) 2,619 2,308
Accrued interest and other assets 3,058 3,274
----------- -----------
TOTAL ASSETS $ 133,956 $ 128,002
=========== ===========
LIABILITIES
Deposits
Non-interest bearing demand $ 19,765 $ 17,650
Interest bearing demand 17,276 15,784
Savings 16,261 15,347
Money market 18,077 19,059
Time (Note 8) 46,276 46,885
----------- -----------
Total deposits 117,655 114,725
Obligation under capital lease 63 104
Borrowed funds (Note 12) 2,200 --
Accrued interest and other liabilities 540 542
----------- -----------
TOTAL LIABILITIES 120,458 115,371
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00, 3,000,000 shares
authorized; none issued -- --
Common stock, par value $1.25 per share; 12,000,000
shares authorized 1,081,453 and 1,030,000 shares
isssued in 1997 and 1996 (Note 15) 1,352 1,288
Additional paid in capital 4,432 3,622
Retained earnings 7,492 7,597
Net unrealized gain on securities 222 124
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,498 12,631
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 133,956 $ 128,002
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ --------------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $ 6,969 $ 5,839
Interest bearing deposits in other banks 1 2
Federal funds sold 89 236
Investment securities:
Taxable
2,279 1,879
Exempt from federal income tax 185 141
---------- ----------
Total interest income 9,523 8,097
---------- ----------
INTEREST EXPENSE
Deposits 3,655 3,282
Borrowed funds 67 63
Lease obligation 5 7
---------- ----------
Total interest expense 3,727 3,352
---------- ----------
NET INTEREST INCOME 5,796 4,745
Provision for loan losses 220 120
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,576 4,625
---------- ----------
OTHER OPERATING INCOME
Service fees on deposit accounts 476 344
Other 120 84
---------- ----------
Total other operating income 596 428
---------- ----------
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,240 1,903
Occupancy, furniture and equipment 688 524
Other (Note 9) 1,454 1,209
---------- ----------
Total other operating expense 4,382 3,636
---------- ----------
Income before income taxes 1,790 1,417
Income taxes (Note 10) 546 436
---------- ----------
NET INCOME $ 1,244 $ 981
========== ==========
EARNINGS PER SHARE $ 1.15 $ 1.15
AVERAGE SHARES OUTSTANDING 1,081,453 852,403
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid in Retained Gain on Treasury
Stock Capital Earnings Securities Stock Total
-------------- -------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $ 1,000 $ 1,013 $ 6,960 $ 66 $ (6) $ 9,033
Net income 981 981
Dividends declared
($.41 per share) (344) (344)
Net proceeds from sale of
230,800 shares of common
stock (Note 15) 288 2,609 6 2,903
Net unrealized gain on securities 58 58
-------------- -------------- -------------- -------------- ------------- -----------------
Balance December 31, 1996 1,288 3,622 7,597 124 - 12,631
Net income 1,244 1,244
Dividends declared
($.44 per share) (474) (474)
Five percent stock dividend
including fractional shares
cash paid (Note 15) 64 810 (875) (1)
Net unrealized gain on securities 98 98
-------------- -------------- -------------- -------------- ------------- ----------------
Balance December 31, 1997 $ 1,352 $ 4,432 $ 7,492 $ 222 $ - $ 13,498
============== ============== ============== ============== ============= ================
</TABLE>
-5-
See accompanying notes to the consolidated financial statements.
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,244 $ 981
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 598 365
Net amortization of investment security
discounts and premiums 198 220
Provision for loan losses 220 120
Deferred income taxes (3) (60)
(Increase) decrease in accrued interest receivable 102 (358)
Increase in accrued interest payable 2 61
Other, net (250) (370)
-------- --------
Net cash provided by operating activities 2,111 959
-------- --------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 5,000 --
Held to maturity 4,157 8,961
Proceeds from sales of investment securities:
Available for sale 1,990 90
Purchases of investment securities:
Available for sale (2,748) (26,168)
Held to maturity -- (3,136)
Net loan originations (17,813) (4,218)
Purchases of premises and equipment (588) (779)
Proceeds from sales of foreclosed or other bank property 10 50
Net proceeds from branch acquisition (Note 2) -- 12,683
-------- --------
Net cash used for investing activities (9,992) (12,517)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 2,930 11,605
Net increase in short-term borrowings 200 --
Proceeds from Federal Home Loan Bank advance 2,000 --
Payments for obligation under capital lease (41) (39)
Proceeds from sale of common stock, net of cost -- 2,903
Cash dividends paid (475) (344)
-------- --------
Net cash provided by financing activities 4,614 14,125
-------- --------
Increase (decrease) in cash and cash equivalents (3,267) 2,567
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,242 5,675
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,975 $ 8,242
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<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 of Emlenton (Bank). The Bank is
a national association headquartered in Emlenton, Pennsylvania. The Company's
principal sources of revenue emanate from its investment securities portfolio,
its portfolio of residential real estate, commercial mortgage, commercial and
consumer loans, as well as a variety of deposit services offered to its
customers through seven offices. The Company is supervised by the Board of
Governors of the Federal Reserve System, while the Bank is subject to regulation
and supervision by the Office of the Comptroller of the Currency.
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.
Investment Securities
- ---------------------
Investment securities have been classified into two categories: Held to Maturity
and Available for Sale. Debt securities acquired with the ability and intent to
hold to maturity are stated at cost adjusted for amortization of premium and
accretion of discount which are computed using the interest method and
recognized as adjustments of interest income. All other debt securities have
been classified as available for sale to serve principally for liquidity
purposes. Unrealized holding gains and losses for available for sale securities
are reported as a separate component of stockholders' equity, net of tax, until
realized. Realized securities gains and losses are computed using the specific
identification method. Interest and dividends on securities are recognized as
income when earned.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank represents
ownership in institutions which are wholly-owned by other financial
institutions. These equity securities are accounted for at cost and classified
as available for sale.
Loans
- -----
Loans are reported at their principal amount net of the allowance for loan
losses. Interest on all loans is recognized as income when earned on the accrual
method. The accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions, that the
borrower's financial condition is such that collection of interest is doubtful.
Interest payments received on nonaccrual loans are recorded as income or applied
against principal according to management's judgment as to the collectibility of
such principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related loan
yield. The Company is amortizing these amounts over the contractual lives of the
related loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based upon management's periodic
evaluation of individual loans, the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses are particularly
susceptible to significant change in the near term.
The Company considers a commercial or commercial real estate loan to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect principal or interest due according to the contractual
terms of the loan. Loan impairment is measured based on the present value of
expected cash flows discounted at the loan's effective
7
<PAGE>
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded investment
in the loan. For loans other than those that the Company expects repayment
through liquidation of the collateral, when the remaining recorded investment in
the impaired loans is less than or equal to the present value of the expected
cash flows, income is recorded on a cash basis.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and repairs are charged
against income as incurred. Costs of major additions and improvements are
capitalized.
Other Real Estate
- -----------------
Other real estate owned acquired in settlement of foreclosed loans is carried as
a component of other assets at the lower of cost or fair value minus the cost to
sell. Valuation allowances for estimated losses are provided when the carrying
value of the real estate acquired exceeds the fair value. Direct costs incurred
in the foreclosure process and subsequent holding costs incurred on such
properties are recorded as expenses of current operations.
Intangible Assets
- -----------------
The excess cost over net tangible assets and identified intangible assets of
acquired branch offices is amortized using the straight-line method over a
period not to exceed fifteen years. Core deposit intangible premiums are
amortized on a straight-line basis over the average remaining lives of the
acquired deposits, not to exceed ten years. Other identified intangible assets
are amortized over the estimated benefited period, not to exceed ten years.
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
- ------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share. The
Company maintains a simple capital structure therefore, there are no dilutive
effects on earnings per share.
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 1997 and 1996 were $3,725,000 and $3,292,000,
respectively. Cash payments for income taxes in 1997 and 1996 were $625,000 and
$501,000, respectively.
Reclassification
- ----------------
Certain comparative amounts for 1996 have been reclassified to conform to the
current year presentation. Such reclassification had no effect on net income.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
- --------------------------------------------------------------------------------
of Liabilities
- --------------
In June 1996, the Financial Accounting Standards board issued Statement No. 125,
"Accounting for Transfers of Financial Assets and Extinguishments of
Liabilities." This statement, which became effective January 1, 1997, provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This statement also extends the treatment
of mortgage servicing rights to all servicing assets.
8
<PAGE>
Certain provisions of Statement 125, were deferred for one year by Statement
127. The deferral affected repurchase agreements, securities lending, and
pledged collateral. The adoption of these statements did not have a material
impact on the Company's financial position or results of operations.
Reporting Comprehensive Income
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income." This standard which is effective for years
beginning after December 15, 1997, establishes standards for reporting the
components of comprehensive income by requiring that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes net
income, as well as, certain items that are reported directly within separate
components of stockholders' equity, and thus bypass net income. This disclosure
will have no impact on the Company's financial position or results of
operations.
Disclosures About Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way public companies report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The statement defines an operating segment as a component of an
enterprise that generates revenue and incurs expense, whose operating results
are reviewed by the chief operating decision maker in the determination of
resource allocation and performance, and for which discrete financial
information is available. This Statement is effective for fiscal years beginning
after December 15, 1997, however, it does not require disclosure in interim
reporting in the year of initial application.
3. BRANCH ACQUISITION
On September 20, 1996, the Bank acquired certain deposit liabilities of the
Knox, Pennsylvania office of Mellon Bank, N.A. in a transaction recorded as a
branch purchase. The Bank assumed deposit liabilities of approximately $14.1
million and acquired the land, building and equipment. The difference between
the liabilities assumed and the assets acquired was received in cash totaling
approximately $12.6 million. The amount by which the acquisition cost exceeded
the value of the assets purchased, totaling approximately $1.4 million, was
recorded as an intangible asset.
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows (in thousands):
9
<PAGE>
<TABLE>
<CAPTION>
Available for Sale 1997
----
Gross Gross Estimated
Amortized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $17,510 $ 163 $ (1) $17,672
Obligations of states and political
subdivisions 3,617 43 -- 3,660
Corporate notes 10,067 134 (3) 10,198
------- ------- ------- -------
Total debt securities 31,194 340 (4) 31,530
Equity investment in Federal Reserve
and Federal Home Loan Banks 447 -- -- 447
------- ------- ------- -------
Total $31,641 $ 340 $ (4) $31,977
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity 1997
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $1,006 $ 7 $ -- $1,013
Obligations of states and political
subdivisions 1,390 1 -- 1,391
Corporate notes 2,978 10 (3) 2,985
Mortgage-backed securities 683 -- (19) 664
------ ------ ------ ------
Total $6,057 $ 18 $ (22) $6,053
====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Available for Sale 1996
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $23,539 $ 166 $ (43) $23,662
Obligations of states and political
subdivisions 1,920 1 (3) 1,918
Corporate notes 10,157 94 (27) 10,224
------- ------- ------- -------
Total debt securities 35,616 261 (73) 35,804
Equity investment in Federal Reserve
and Federal Home Loan Banks 404 -- -- 404
------- ------- ------- -------
Total $36,020 $ 261 $ (73) $36,208
======= ======= ======= =======
</TABLE>
10
<PAGE>
Held to Maturity 1996
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 2,012 $ -- $ (1) $ 2,011
Obligations of states and political
subdivisions 3,130 5 (1) 3,134
Corporate notes 3,528 9 (6) 3,531
Mortgage-backed securities 1,605 -- (35) 1,570
------- ------- ------- -------
Total $10,275 $ 14 $ (43) $10,246
======= ======= ======= =======
Proceeds from the sale of investment securities classified as available for sale
totaled $1,990,000 and $90,000 for 1997 and 1996, respectively. No gains or
losses resulted from these sales.
Investment securities with a carrying value of approximately $5,738,000 and
$5,363,000 at December 31, 1997 and 1996, respectively, were pledged to secure
deposits and for other purposes as required by law. The carrying value
approximated the estimated market value of the investment securities for both
years.
The amortized cost and estimated market value of debt securities at December 31,
1997, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 5,502 $ 5,513 $ 2,566 $ 2,563
Due after 1 year through 5 years
23,995 24,299 3,080 3,093
Due after 5 years through 10 years
1,697 1,718 -- --
After 10 years
-- -- 411 397
------- ------- ------- -------
Total $31,194 $31,530 $ 6,057 $ 6,053
======= ======= ======= =======
11
<PAGE>
5. LOANS
Major classifications of loans are summarized as follows (in thousands):
1997 1996
---- ----
Commercial and industrial $11,147 $10,390
Real estate mortgages
Residential 45,709 34,251
Commercial and other 15,188 11,400
Consumer 14,100 12,387
------- -------
86,144 68,428
Less allowance for loan losses 874 733
------- -------
Total $85,270 $67,695
======= =======
In the normal course of business, loans are extended to directors, executive
officers, and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness, with the exception of consumer and
residential mortgage loans granted to executive officers which carry an interest
rate one percent below that quoted non-employees. Such loans, which are included
in the following schedule, totaled $197,000 and $ - at December 31, 1997 and
1996, respectively. A summary of loan activity for those directors, executive
officers, and their associates with aggregate loan balances in excess of $60,000
for the year ended December 31, 1997, is as follows (in thousands):
Balance Balance
December 31, December 31,
1996 New Loans Repayments 1997
---- ---------- ----------- ----
$1,253 664 749 $1,168
The Bank's primary business activity is with customers located within Venango,
Clarion, and Butler Counties. Commercial, residential, personal, and
agricultural loans are granted. Although the Bank has a diversified loan
portfolio at December 31, 1997 and 1996, loans outstanding to individuals and
businesses are dependent upon the local economic conditions within the immediate
trade area.
12
<PAGE>
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows (in
thousands):
1997 1996
---- ----
Balance, January 1 $733 $687
Provision charged to operations 220 120
Recoveries 29 47
Less loans charged off 108 121
---- ----
Balance, December 31 $ 874 $ 733
==== ====
At December 31, 1997 and 1996, the recorded investment in loans which are
considered to be impaired was $685,000 and $743,000, respectively, all of which
was placed in nonaccrual status. In addition, $70,000 and $80,000 of the related
allowance for loan losses has been allocated for these impaired loans at
December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, There
were commitments for unfunded letters of credit totaling $7,500, to a borrower
with outstanding loans considered to be impaired.
The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996, was approximately $719,000 and $820,000,
respectively. Interest income totaling $14,000 and $13,000 was recognized on
impaired loans in 1997 and 1996, respectively, all of which was recognized using
the cash basis method of income recognition.
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows (in
thousands):
1997 1996
---- ----
Land and improvements $ 256 $ 221
Buildings 1,431 1,430
Construction in process 489 --
Leasehold improvements 148 129
Furniture and fixtures 1,695 1,656
------ ------
4,019 3,436
Less accumulated depreciation
1,400 1,128
------ ------
Total $2,619 $2,308
====== ======
Depreciation and amortization charged to operations was $272,000 in 1997 and
$201,000 in 1996.
Included in construction in process are the costs associated with the
construction of a data processing center by the Bank. Construction, equipment
and furnishing costs are estimated to total $1.2 million. Construction is
expected to be completed during the second quarter of 1998.
13
<PAGE>
8. TIME DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $4,328,000 and $4,583,000 at December 31, 1997
and 1996, respectively. The following schedule presents the contractual
maturities for time deposits in excess of $100,000 at December 31, 1997 (in
thousands):
Within three months $ 548
After three months through six months 362
After six months through one year 986
After one year 2,432
Total $4,328
9. OTHER EXPENSES
The following is an analysis of other expense (in thousands:
1997 1996
---- ----
Telephone $ 105 $ 91
Printing forms and supplies
138 183
Postage
140 97
Amortization of intangible assets
243 129
Other
828 709
---- ----
$1,454 $1,209
====== =====
10. INCOME TAXES
The provision for income taxes is summarized as follows:
1997 1996
----- -----
Currently payable $ 549 $ 496
Deferred (3) (60)
----- -----
546 $ 436
===== =====
The reconciliation between the federal statutory rate and the Company's
effective income tax rate is as follows (dollars in thousands):
14
<PAGE>
1997 1996
---- ----
% of Pre-Tax % of Pre-Tax
Amount Income Amount Income
------ ------ ------ ------
Provision at statutory rate $ 609 34.0% $ 482 34.0%
Effect of tax exempt income (76) (4.2) (57) (4.0
Other 13 0.7 11 0.8
----- ---- ----- -----
Total $ 546 30.5% $ 436 30.8%
===== ==== ===== ====
The tax effects of deductible and taxable temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax liabilities,
respectively, at December 31 are as follows (in thousands):
1997 1996
---- ----
Deferred tax assets
Provision for loan losses $244 $196
Intangible asset amortization 83 51
Capital lease obligation 21 35
Pension expense 35 16
---- ----
Gross deferred tax assets 383 298
---- ----
Deferred tax liabilities
Net unrealized gain on securities 114 64
Depreciation 215 143
Net loan origination costs 17 7
---- ----
Gross deferred tax liabilities 346 214
---- ----
Net deferred tax asset $ 37 $ 84
==== ====
No valuation allowance was established, for the net deferred tax asset, at
December 31, 1997 and 1996, in view of the Company's ability to carry-back to
taxes paid in previous years and future anticipated taxable income which is
evidenced by the Company's earnings potential.
11. PENSION PLAN
The following presents the components of the pension expense for each year (in
thousands):
1997 1996
----- -----
Service cost of benefits earned during the period $ 95 $ 66
Interest cost on projected benefit obligation 99 75
Return on plan assets (128) (177)
Net amortization and deferral (8) 50
----- -----
Net periodic pension cost $ 58 $ 14
===== =====
15
<PAGE>
The actuarial present value of accumulated benefit obligations at December 31,
1997 and 1996, was $997,000 and $738,000 including vested benefit obligations of
$964,000 and $715,000. The following table sets forth the funded status and
amounts recognized in the balance sheets at December 31, (in thousands):
1997 1996
------- -------
Plan assets at fair value $ 1,802 $ 1,510
Projected benefit obligation 1,586 1,319
------- -------
Funded status 216 191
Unrecognized net gain from past experience
different from assumed (208) (117)
Unamortized prior service cost 1 1
Unrecognized net transition asset (113) (121)
------- -------
Accrued pension cost $ (104 $ (46)
======= =======
Plan assets are primarily comprised of debt and equity mutual funds at December
31, 1997 and 1996.
In preparing the above information the following actuarially assumed rates were
used.
1997 1996
---- ----
Discount rate 7.25% 7.50%
Rate of increase in future compensatin levels 5.00 5.00
Rate of return on plan assets 8.50 8.50
12. BORROWED FUNDS
Short-term Borrowings and Available Lines of Credit
The Bank maintains two credit arrangements as sources of additional liquidity.
One of these arrangements, with a borrowing limit at December 31, 1997, of
approximately $3.4 million, is with the Federal Home Loan Bank of Pittsburgh
(FHLB). This credit line is subject to annual renewal, incurs no service
charges, and is secured by a blanket security agreement on outstanding
residential mortgage loans and the FHLB stock owned by the Bank.
The second arrangement is an unsecured federal funds line of credit, subject to
annual renewal, with a borrowing limit at December 31, 1997 of $3.1 million,
maintained with a correspondent bank.
The following table presents information related to short- term borrowings
during 1997 and 1996 (dollars in thousands):
1997 1996
--------- ---------
Outstanding balance at December 31, $ 200 $ --
Average balance outstanding
117 1,128
Maximum month-end balance
1,250 5,000
Weighted average interest rate for the year 5.71% 5.60%
Weighted average interest rate at year-end 6.75 N/A
Long-term borrowings
Included in borrowed funds is an advance from the FHLB totaling $2,000,000 at
December 31, 1997, maturing July 11, 2002, with a current interest rate of
5.60%. This borrowing has a fixed interest rate for the first six months, at
which time it may convert to a variable rate instrument should the benchmark
interest rate reach 6.50%. The
16
<PAGE>
Bank as the option to repay the borrowing without penalty at the conversion
date, or at any subsequent repricing date. This borrowing is secured by a
blanket security agreement on outstanding residential mortgage loans and the
FHLB stock owned by the Bank
13. COMMITMENTS AND CONTINGENT LIABILITIES
Loans and Letters of Credit
- ---------------------------
In the normal course of business, the Bank makes various commitments which are
not reflected in the accompanying financial statements. The Bank offers such
products to enable its customers to meet their financing objectives. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss in the event of nonperformance by the other parties to
the financial instruments is represented by the contractual amounts as
disclosed. Losses, if any, are charged to the allowance for loan losses. The
Bank minimizes its exposure to credit loss under these commitments by subjecting
them to credit approval and review procedures and collateral requirements as
deemed necessary.
The off-balance sheet commitments were comprised of the following at December
31, (in thousands):
1997 1996
---- ----
Commitments to extend credit $8,122 $6,810
Standby letters of credit
1,225 1,112
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of available commercial and personal lines
of credit and loans approved but not yet funded. The Bank uses the same credit
policies in making loan commitments and conditional obligations as it does for
on-balance sheet instruments. Since many of the credit line commitments are
expected to expire without being fully drawn upon, the total contractual amounts
do not necessarily represent future funding requirements.
Standby letters of credit obligate the Bank to disburse funds to a third party
if the Bank's customer fails to perform under the terms of the agreement with
the beneficiary. These instruments are issued primarily to support bid or
performance-related contracts. The coverage period for these instruments is
typically a one year period with an annual renewal option subject to prior
approval by management. The Bank generally holds collateral for these
instruments, as deemed necessary.
Operating Leases
- ----------------
Certain office facilities are leased under various operating leases. Rental
expense was $45,000 and $23,000 in 1997 and 1996, respectively. Future minimum
rental commitments under noncancellable leases are (in thousands):
Future Minimum
Lease Payments
1998 $45
1999
48
2000 48
2001 10
2002 -
17
<PAGE>
14. REGULATORY MATTERS
Cash and Due from Banks
- -----------------------
The district Federal Reserve Bank requires the Bank to maintain certain reserve
balances. As of December 31, 1997 and 1996, the Bank had required reserves of
$899,000 and $880,000 comprised of vault cash, and a depository amount held with
the Federal Reserve Bank.
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 and surplus. There were no loans
between the Bank and the Company during 1997 and 1996.
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 transfer to surplus. Using this formula, the amount available
for payment of dividends by the Bank to the Company in 1998, without approval of
the comptroller, will be limited to $1,514,000 plus net profits retained up to
the date of the dividend declaration.
Regulatory Capital Requirements
- -------------------------------
The Company is subject to various capital requirements administered by the
federal banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial position and results of operations.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios, as set forth in the
table below, of total capital and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes that as of December 31,
1997. the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997 and 1996, the Company has been categorized as "Well
Capitalized" under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company must maintain minimum total
risk-based, Tier 1, and Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management
believes have changed the Company's classification category.
<TABLE>
<CAPTION>
Regulatory Capitalization Requirement
-------------------------------------
Actual Adequate Well
------ -------- ----
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total capital to risk weighted assets $ 12,795 15.0% $ 6,824 8.0% $ 8,530 10.0%
Tier 1 capital to risk weighted assets 11,921 14.0 3,412 4.0 5,118 6.0
Tier 1 capital to average assets 11,921 9.1 5,260 4.0 6,576 5.0
December 31, 1996
Total capital to risk weighted assets $ 11,558 15.7% $ 5,896 8.0% $ 7,371 10.0%
Tier 1 capital to risk weighted assets 10,824 14.7 2,948 4.0 4,422 6.0
Tier 1 capital to average assets 10,824 8.7 4,990 4.0 6,238 5.0
</TABLE>
18
<PAGE>
15. COMMON STOCK
Stock Dividend
- --------------
On December 18, 1997, the Company distributed 51,453 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend, common
stock was increased by $64,000, additional paid-in capital was increased by
$810,000, and retained earnings was decreased by $875,000. Fractional shares
were paid in cash. All references to per share amounts in the accompanying
financial statements for 1996 have been restated to reflect the stock dividend.
Stock Sale
- ----------
On December 12, 1996, the Company completed the sale of 230,800 shares of common
stock, par value $1.25. These shares were sold at a price of $13.50 per share,
resulting in net proceeds to the Company of $2,903,000. Included in the shares
offered were 800 shares of stock which had been previously held as treasury
shares. Upon completion of the stock sale the Company directly contributed
$2,800,000 to the Bank in the form of additional paid-in capital.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms. Fair value is defined as the amount
at which a financial instrument could be exchanged in a current transaction
between willing parties other than in a forced or liquidation sale. If a quoted
market price is available for a financial instrument, the estimated fair value
would be calculated based upon the market price per trading unit of the
instrument.
If no readily available market exists, the fair value estimates for financial
instruments would be based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated fair values
may not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which the
estimated fair values are based may have a significant impact on the resulting
estimated fair values.
As certain assets and liabilities, such as deferred tax assets and premises and
equipment, are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The estimated fair values at December 31, 1997 and 1996, of the Company's
financial instruments are as follows (in thousands):
19
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks and federal
funds sold $ 4,975 $ 4,975 $ 8,242 $ 8,242
Investment securities:
Available for sale 31,977 31,977 36,208 36,208
Held to maturity 6,057 6,053 10,275 10,246
Net loans 85,270 86,811 67,695 68,583
Accrued interest receivable 1,009 1,009 1,111 1,111
-------- -------- -------- --------
$129,288 $130,825 $123,531 $124,390
======== ======== ======== ========
Financial liabilities
Deposits $117,655 $117,986 $114,725 $114,423
Borrowed funds
2,200 2,200 -- --
Accrued interest payable
322 322 320 320
-------- -------- -------- --------
$120,177 $120,508 $115,045 $114,743
======== ======== ======== ========
</TABLE>
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 values are estimated
using the quoted market price for similar securities.
The fair value of securities available for sale is equal to the current carrying
value.
Loans Deposits and Borrowed Funds
- ----------------------------------
The fair value of loans is estimated by discounting the future cash flows using
a simulation model which estimates future cash flows and constructs discount
rates that consider reinvestment opportunities, operating expenses, non-interest
income, credit quality, and prepayment risk. Demand, savings, and money market
deposit accounts are valued at the amount payable on demand as of year end. Fair
value for time deposits and borrowed funds are estimated using a discounted cash
flow calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
borrowed funds of similar remaining maturities.
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 Note 13.
20
<PAGE>
16. PARENT COMPANY
CONDENSED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash on deposit in subsidiary bank $ 6 $ 166
Investment in bank subsidiary 13,490 12,539
Other assets 8 3
------- -------
TOTAL ASSETS $13,504 $12,708
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 6 $ 77
Stockholders' equity 13,498 12,631
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,504 $12,708
======= =======
</TABLE>
CONDENSED STATEMENT OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
<S> <C> <C>
NCOME
Dividends from subsidiary $ 403 $ 325
EXPENSES 18 8
------- -------
Income before income taxes and equity in undistributed
earnings of subsidiary 385 317
Income tax benefit (6) (3)
------- -------
Income before equity in undistributed earnings in subsidiary 391 320
Equity in undistributed earnings in subsidiary 853 661
------- -------
NET INCOME $ 1,244 $ 981
======= =======
</TABLE>
21
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,244 $ 981
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (853) (661)
Other, net (76) 77
------- -------
Net cash provided by operating activities 315 397
------- -------
INVESTING ACTIVITIES
Investment in subsidiary -- (2,800)
------- -------
Net cash used for investing activities -- (2,800)
------- -------
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of cost -- 2,903
Cash dividends paid (475) (344)
------- -------
Net cash provided by (used for) financing activities (475) 2,559
------- -------
Increase (decrease) in cash (160) 156
CASH AT BEGINNING OF YEAR 166 10
------- -------
CASH AT END OF YEAR $ 6 $ 166
======= =======
</TABLE>
22
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emclaire Financial
Corp. and Subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/S.R. Snodgrass
- -----------------
S. R. Snodgrass, A.C.
Wexford, PA
February 6, 1998
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Emclaire Financial Corp. ("Emclaire or the "Company") is the parent holding
company for the Farmers National Bank of Emlenton ("Farmers" or the "Bank"). The
following discussion and analysis is intended to provide information about the
financial condition and results of operation of the Company and should be read
in conjunction with the Consolidated Financial Statements and the related notes
thereto appearing elsewhere in this annual report.
Certain information presented in this discussion and analysis and other
statements concerning future performance, developments or events, and
expectations for growth and market forecasts constitute forward-looking
statements which are subject to a number of risks and uncertainties, including
interest rate fluctuations, changes in local or national economic conditions,
and government and regulatory actions which might cause actual results to differ
materially from stated expectations or estimates.
- --------------------------------------------------------------------------------
Graphic Omitted
- --------------------------------------------------------------------------------
OVERVIEW
During 1997 Emlcaire Financial Corp. focused on maximizing the returns resulting
from the growth and expansion undertaken in 1996. The Company sought to take
advantage of its new and expanded markets to establish or expand banking
relationships with new and existing customers. This resulted in total loans
increasing 26% to $86.1 million and total deposits rising 3% to $117.7 million.
Due largely to the increase in the loan portfolio, net interest income, on a tax
equivalent basis, increased 22%, resulting in an increase in net income of 27%.
Due to the effect of the issuance of 230,800 additional shares in December 1996,
earnings per share for 1997 of $1.15, remained unchanged from 1996.
In August 1997, ground was broken for the Bank's new data center. When completed
this facility, located in downtown Emlenton, will house the data processing and
bookkeeping operations. Construction is scheduled to be completed in April 1998.
As 1998 began, the Bank made plans to open its eighth office at Clarion Mall.
The full service office will be located in a site previously occupied by another
financial institution. This new location will allow us to better serve our
existing Clarion customers, by providing them an alternate site to conduct their
banking business, while allowing Emclaire the opportunity to attract new
customers from the western side of Clarion. This office is scheduled to open
late in March.
RESULTS OF OPERATIONS
Summary
For 1997, Emclaire posted net income of $1.2 million, an increase of $263,000 or
27% from 1996. This increase was largely due to the 22% increase in net interest
income, on a tax equivalent basis, which rose $1.1 million, to $5.9 million. The
$14.2 million or 22% increase in loan volume was the principal factor for the
increase in net interest income.
Other operating income of $596,000 rose $168,000 or 39% from 1996, due to the
restructuring of fees for overdrafts and returned items, as well as fee income
associated with ATM convenience charges and debit card transactions.
Total other operating expenses for the Company increased 21% to $4.4 million in
1997 as compared to $3.6 million in 1996. This increase in other operating costs
was due principally to the overhead associated with a full year of operating the
branch locations opened or purchased in 1996.
Earnings per share for 1997 equaled the $1.15 earned in 1996, due to the
additional weighted shares outstanding resulting from the sale of 230,800 shares
of common stock in December 1996, combined with the effect of the 5% stock
dividend paid in December 1997.
- --------------------------------------------------------------------------------
Graphic Omitted
- --------------------------------------------------------------------------------
24
<PAGE>
Net interest income
The Company's net interest income on a tax equivalent basis increased $1.1
million or 22% to $5.9 million in 1997, due to an increase of $1.45 million or
18% in interest income on a tax equivalent basis, which totaled $9.6 million for
1997 as compared to $8.2 million in 1996. This increase in interest income more
than offset the $375,000 or 11% increase in interest expense.
The increase in interest income in 1997, resulted primarily from an increase of
$1.1 million or 19% in interest income on loans, due to an increase in the
average outstanding balance of the portfolio, which rose $14.2 million to $78.6
million for the year. The 22% increase in loan volume served to offset the
reduction in the overall yield on the portfolio which declined 20 basis points
to 8.89%. The decline in yield is due to a general decline in long-term interest
rates during the second half of 1997, combined with increased competition for
loan customers. Should the current interest rate environment prevail and the
level of competition continue, it is likely the overall return on the loan
portfolio will decline further.
Interest income on investment securities increased $466,000, on a tax equivalent
basis, to $2.6 million. This improvement was the result of the increase in the
average volume of investment securities which rose $5.7 million or 19% for
taxable securities, and $851,000 or 23% for tax-exempt investments. In addition,
the yields on the investment portfolio increased to 6.24% from 6.10% for taxable
securities, and to 6.23% from 5.87%, on a tax equivalent basis, for tax-exempt
investments. The improved yield on the taxable securities portfolio was due to
having the full year effect in 1997, of purchases made during the second and
third quarters of 1996.
For 1997 the yield on earning assets, on a tax equivalent basis, increased 2
basis points to 7.95%. This very modest improvement was the result of the
significant increase in loan volume combined with the increase in volume and
yield on the investment portfolio.
Interest expense increased $375,000 or 11% to $3.7 million for 1997, from $3.4
million in 1996, due to the increase in the average volume of interest-bearing
liabilities which rose $12.3 million during 1997, to $97.3 million. The average
volume of time deposits increased $6.3 million or 16% during 1997, resulting in
an increase in the related interest expense of $294,000 or 14%. In addition, in
July 1997, the Company obtained a $2.0 million five year advance from the
Federal Home Loan Bank.
Due the general decline in interest rates, the cost of interest bearing
liabilities decreased to 3.83% for 1997 as compared to 3.95% for 1996. Despite
the reduction in the cost of funds during 1997, continuing competition for
deposits and a flattening of the yield curve, as the spread between short- and
long-term interest rates narrows, caused interest rates to either increase or
not fall in proportion to the reduction in longer term rates. As a result, the
Company's cost of funds rose during the fourth quarter of 1997 rose to 3.94%.
As a result of the slight improvement in the yield on total earning assets,
combined with the decline in the cost of interest-bearing liabilities, the net
yield on earning assets increased to 4.87% for 1997 as compared to 4.68% in
1996.
The following tables set forth for the periods indicated information regarding
the total dollar amounts of interest income from interest-earning assets and the
resulting average yields, the total dollar amount of interest expense on
interest-bearing liabilities and the resulting average rate paid, net interest
income and the net yield on interest-earning assets (dollars in thousands):
25
<PAGE>
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
1997 1996
---- ----
Average Yield/ Average Yield/
Volume Interest (2) Rate (2) Volume Interest (2) Rate (2)
------ ------------ -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Investment securities
Taxable $ 36,525 $ 2,279 6.24% $ 30,810 $ 1,879 6.10%
Exempt from federal income
tax 4,495 280 6.23 3,644 214 5.87
Interest bearing deposits 24 1 4.17 37 2 5.41
in other banks 37 2
Loans (1) (3) 78,610 6,989 8.89 64,414 5,853 9.09
Federal funds sold 1,610 89 5.53 4,348 236 5.43
--------- -------- ---------
Total interest-earning 121,264 9,638 7.95 103,253 8,184 7.93
-------- ----------
assets
Noninterest-earning assets
Cash and due from banks 4,281 3,638
Allowance for loan losses (795 (714)
Other assets 5,501 4,101
-------- --------
Total assets $ 130,251 $110,278
========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
NOW accounts $ 16,481 295 1.79% $ 12,966 267 2.06%
Money market accounts 18,134 579 3.19 16,921 544 3.21
Savings deposits 15,903 443 2.79 14,558 427 2.93
Time deposits 45,515 2,338 5.14 39,251 2,044 5.21
Obligation under capital lease 85 5 5.88 124 7 5.65
Borrowed funds 1,196 67 5.60 1,128 63 5.59
--------- --------- -------- ---------
Total interest-bearing 97,314 3,727 3.83 84,948 3,352 3.95
-------- ---------
liabilities
Noninterest-bearing liabilities
Demand deposits 19,417 15,257
Other liabilities 517 584
Capital 13,003 9,499
--------- --------
Total liabilities and $ 130,251 $110,288
========= ========
stockholders' equity
Net interest income
and net yield on
interest-earning assets $ 5,911 4.87% $ 4,832 4.68%
========= ====== ======== =======
</TABLE>
(1) - Interest on loans includes fee income
(2) - Tax exempt income on loans and investment securities and the related
yields are computed on a tax equivalent basis computed using the federal
statutory rate of 34%.
(3) - Nonaccrual loans included.
26
<PAGE>
Changes in net interest income are attributable to three factors: 1) a change in
the volume of an interest-earning asset or interest-bearing liability, 2) a
change in interest rates, or 3) a change attributable to a combination of
changes in volume and rate. The following table sets forth certain information
regarding changes in interest income, on a tax-equivalent basis, and interest
expense of the Company for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to 1) changes in volume (changes in volume multiplied by
the old interest rate); and 2) changes in rates (changes in interest rates
multiplied by the old average volume). Changes attributable to a combination of
changes in volume and rate are proportionately allocated to changes in volume
and changes in rate. (dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1997 Change From 1996 1996 Change From 1995
Total Change Due To Total Change Due To
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Taxable investment securities $ 400 $ 356 $ 44 $ 845 $ 712 $ 133
44
Non-taxable investments 66 52 14 (41) (54) 13
Interest bearing deposits in other
banks (1) (1) -- -- -- --
Loans 1,136 1,268 (132) (198) (31) (167)
Federal funds sold (147) (151) 4 38 52 (14)
------- ------- ------- ------- ------- -------
Total interest income 1,454 1,524 (70) 644 679 (35)
------- ------- ------- ------- ------- -------
INTEREST EXPENSE ON:
NOW accounts 28 66 (38) (5) 17 (22)
Money market accounts 35 38 (3) (10) 5 (15)
Savings deposits 16 37 (21) 1 38 (37)
Time deposits 294 321 (27) 320 336 (16)
Obligation under capital lease (2) (2) -- (3) (2) (1)
Borrowed funds 4 4 -- 63 63 --
------- ------- ------- ------- ------- -------
Total interest expense 375 464 (89) 366 457 (91)
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 1,079 $ 1,060 $ 19 $ 278 $ 222 $ 56
======= ======= ======= ======= ======= =======
</TABLE>
Provision for loan losses
The provision for loan losses of $220,000 for the year ended December 31, 1997
represented an 83% increase from the $120,000 provided in 1996. Management makes
periodic provisions to the allowance for loan losses to maintain the allowance
at an acceptable level commensurate with the credit risk inherent in the loan
portfolio. See "Loan Quality" for additional discussion of the allowance for
loan losses. The level at which funds were provided to the allowance during
1997, is a reflection of the overall growth of the loan portfolio during the
year, and is not an indication of any overall decline in the quality of the loan
portfolio. The following table presents a summary of loan losses by loan type
and changes in the allowance for loan losses for the two years ended December
31, 1997 (dollars in thousands):
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Total loans outstanding $86,144 $68,428
======= =======
Average loans outstanding 78,610 64,414
======= =======
Allowance for loan losses at beginning of year $ 733 $ 687
Provision charged to expense 220 120
Charge-offs:
Commercial and industrial 1 11
Real estate 33 1
Consumer 74 109
Total 108 121
------- -------
Recoveries:
Commercial and industrial 2 1
Real estate 19 1
Consumer 8 45
------- -------
Total 29 47
------- -------
Net charge-offs 79 74
------- -------
Allowance for loan losses at end of period $ 874 $ 733
======= =======
Allowance for loan losses as a percent of total loans 1.01% 1.07%
Net charge-offs as a percent of average loans .10 .11
</TABLE>
Other operating income
Other operating income which is comprised principally of fees and charges on
customer deposit accounts increased $168,000 or 39% to $596,000 in 1997 from
$428,000 in 1996. Service charges on customer accounts increased $132,000 or
38%, due to the restructuring of overdraft charges, combined with the increase
in volume resulting from the additional branch operations, and the
implementation of a charge on returned deposit items. Other income increased
$36,000 or 43% during the same period due primarily to fees from the
MasterMoney(TM) debit card product introduced in August, and the imposition of
an ATM convenience charge for non-customers using a Farmers ATM.
Other operating expense
Other operating expense increased $746,000 or 21% to $4.4 million in 1997 as
compared to $3.6 million in 1996. This increase is largely attributed to the
overhead costs associated with the impact of the full year of operations of the
branch offices established in 1996. The new branch operations generated
approximately $690,000 in additional overhead expenses during 1997, in
comparison to the expenses related to part-year operation of these offices in
1996.
Salaries and employee benefits for 1997 totaled $2.2 million, an increase of
$337,000 or 18% from $1.9 million reported in 1996. Of this total increase,
approximately $175,000 represents the effect of a full year's expense associated
with new employees added during 1996, including those at the new branch offices.
Normal recurring employee cost increases for such things as salaries and
hospitalization insurance and pension benefits represents approximately $150,000
of the increase. For 1998, in addition to normal recurring salary adjustments,
it is expected certain employee benefit costs will increase, such as medical
benefits which will rise approximately 14% or $36,000.
Occupancy and equipment expense increased $164,000 or 31% in 1997. Of this
increase, $90,000 is due to additional costs related to the operation of the new
branch offices. Depreciation costs associated with capital expenditures made
during the fourth quarter of 1996, for a wide area network and teller terminal
platform accounted for approximately $68,000 of the increase.
28
<PAGE>
Other expenses for 1997 totaled $1.5 million, a $245,000 or 20% increase from
the $1.2 million reported in 1996. Costs associated with the additional branch
offices primarily accounted for this increase. Specifically, amortization of
intangible assets increased approximately $114,000 due to the purchase of the
Knox branch office in 1996. The remaining increase is principally attributed to
the full year of operations of the branch offices.
In 1997, management began an assessment of the current data processing
operation, including the space occupied by the data processing and bookkeeping
departments located at the Emlenton office, and the impact of the branch
expansion in 1996 on the available data processing capacity. This project
resulted in the construction of the previously mentioned data processing center.
While this facility will improve the efficiency with which daily transactions
are processed, as well as, increasing the capacity to process transactions, the
overhead associated with this facility will increase operating expenses
approximately $65,000, annually.
In addition to the construction of the data center, the assessment of the
Company's data processing system, indicated that based on growth projections, an
upgrade or replacement of the existing equipment was needed. The assessment of
hardware and software vendors began during the fourth quarter of 1997 and is
expected to be completed early in the second quarter of 1998. Based on
preliminary cost estimates, a complete upgrade of the data processing equipment
and software could require a capital investment ranging from $250,000 to
$500,000. The time frame for having this upgrade completed is the first quarter
of 1999, so as to allow sufficient time to perform testing for year 2000
compliance.
Income Tax Expense
Income tax expense increased $110,000 or 25% during 1997 when compared to 1996,
due to the 26% increase in income before income taxes.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997, amounted to $133.9 million, an increase of
$5.9 million or 5%, over total assets at December 31, 1996. The increase was
funded by a $2.9 million or 3% increase in deposits, and a $2 million Federal
Home Loan Bank Advance.
Investment Securities
Total investment securities decreased $8.5 million during 1997, to $38.0
million, as the proceeds from investment security sales and maturities were used
to fund loan demand.
Information detailing the book value of the investment portfolio by security
type and classification is presented in Note 4 to the consolidated financial
statements.
- --------------------------------------------------------------------------------
Graphic Omitted
- --------------------------------------------------------------------------------
Loans
Loans receivable at December 31, 1997 totaled $86.1 million, an increase of
$17.7 million or 26% from 1996. The establishment of the three additional
offices during 1996, expanded Emclaire's market area and served to increase loan
demand. The two newest markets accounted for approximately 53% of the total
increase in loans.
- --------------------------------------------------------------------------------
Graphic Omitted
- --------------------------------------------------------------------------------
The loan growth generated during 1997, was largely from increases in loans
secured by residential or commercial real estate. These segments of the
portfolio increased $11.5 million or 33%, and $3.8 million or 33%, respectively.
Of the residential mortgage loan increase, $2.5 million consisted of
construction and purchase money mortgages originated with the assistance of a
mortgage broker. Commercial loans grew $757,000 or 7%, while consumer loans
increased $1.7 million or 14% during 1997. The increase in consumer loans is
attributed to two direct mail solicitations during the year that generated
approximately $1.2 million in new loans.
29
<PAGE>
The following table presents the composition of the loan portfolio and the
percentage of loans by type at December 31, 1997 an d1996 (dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
% of loans % of loans
to to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial and industrial $11,147 12.9% $10,390 15.2%
Commercial and multi-family real estate 15,188 17.6 11,400 16.6
1 - 4 Family real estate 45,709 53.1 34,251 50.1
Consumer 14,100 16.4 12,387 18.1
------- ----- ------- -----
Total loans 86,144 100.0% 68,428 100.0%
===== =====
Less: allowance for loan losses 874 733
------- -------
Net loans $85,270 $67,695
======= =======
</TABLE>
Loan Quality
Loans are subject to ongoing periodic monitoring by management and the Board of
Directors. Loans are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful; but not longer
than 90 days past due for non-real estate loans and 120 days past due for loans
secured by real estate. Interest accrued and unpaid at the time the account is
placed on nonaccrual status is generally charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income based upon management's assessment of the
collectibility of the account.
At December 31, 1997, the Bank had $171,000 in loans greater than 90 days past
due and still accruing interest, and $820,000 in loans on nonaccrual status.
Of the total non-performing loans, $685,000 in principal amounts of loans to a
single customer were classified as impaired loans. A loan is considered to be
impaired when, based on current information, it is probable the Company will be
unable to collect all principal and interest due in accordance with the
contractual terms of the loan agreement. These impaired loans consist of four
commercial real estate loans to one borrower. The loans are secured by real
estate. During 1996, the borrower sought bankruptcy protection under Chapter 11,
and continues to operate. During 1997, $82,000 in payments were received on this
account, resulting from the liquidation of collateral. Of the funds received,
$68,000 was applied to principal and $14,000 was recognized as interest income.
As part of management's ongoing assessment of its loan portfolio, $70,000 of the
allowance for loan losses at December 31, 1997, has been allocated for these
loans. Management believes the Company is adequately secured by the underlying
collateral.
The following table sets forth non-performing loans at December 31, 1997 and
1996, along with nonaccrual loan interest data for 1997 (dollars in thousands):
30
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Loans past due 90 days or more and
accruing $ 171 111
Nonaccrual loans 820 778
---- --------
Non performing loans $991 $ 889
==== ========
Non-performing loans to total loans 1.15% 1.30%
Allowance for loan losses to non-
performing loans 88.19 82.45
Non-performing loans to total assets .74 .69
Nonaccrual loan interest data:
Interest computed on original $ 81
=======
terms
Interest recognized in income $ 15
=======
</TABLE>
At December 31, 1997, no real estate or other assets were held as foreclosed or
repossessed property. In addition, based upon the ongoing quarterly review and
assessment of credit quality management is not aware of any trends or
uncertainties related to any accounts which might have a material adverse effect
on future earnings, liquidity, or capital resources.
Based upon the results of the quarterly internal loan review process, and
considering the trend of past loan losses and recoveries, as well as, the
current risk elements in the loan portfolio, management believes the allowance
for loan losses at December 31, 1997 is adequate. The following table presents
management's estimate of the allocation of the allowance for loan losses among
the loan categories, along with the percentage of loans in each category to
total loans (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
% of Loans % of Loans
to to
Amount Total Loans Amount Total Loans
---- ------ ----- ------
<S> <C> <C> <C> <C>
Commercial and industrial $ 49 12.9% $106 15.2%
Commercial & multi-family real estate 205 17.6 158 16.6
1-4 family real estate 19 53.1 13 50.1
Consumer 101 16.4 106 18.1
Unallocated 500 -- 350 --
---- ----- ---- ------
$874 100.0% $733 100.0%
==== ===== ==== =====
</TABLE>
31
<PAGE>
Deposits
Total deposits of $117.7 million at December 31, 1997, represented an increase
of $3.0 million or 3% from December 31, 1996. The increase in deposits is
princiaplly attributed to growth at the newest office locations.
See also, "Average Balance Sheets and Net Interest Analysis" for information
related to the average amount and average interest rate paid on deposit accounts
during 1997 and 1996. Information related to the maturity of time deposits of
$100,000 and over at December 31, 1997 is presented in Note 8 of the
accompanying consolidated financial statements.
- --------------------------------------------------------------------------------
Graph Omitted
- --------------------------------------------------------------------------------
Stockholders' Equity
Stockholders' equity increased $867,000 or 7% during 1997 to $13.5 million. This
increase was the result of $769,000 of net retained earnings during the year.
In December 1997, the Company paid a 5% stock dividend resulting in the issuance
of 51,453 shares of common stock.
- --------------------------------------------------------------------------------
Graph Omitted
- --------------------------------------------------------------------------------
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. The Company's market risk is comprised principally of interest
rate risk. The Company's Asset/Liability committee is responsible for reviewing
the interest rate sensitivity position of the Company and establishing policies
to monitor and limit exposure to interest rate risk. The guidelines established
by the Asset/Liability committee are subject to review by the Company's Board of
Directors.
Asset/Liability Management
One of the principal functions of the Company's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates.
Interest rate sensitivity is the relationship of differences in the amounts and
repricing dates of interest-earning assets and interest-bearing liabilities. In
order to measure the impact on net interest income and pre-tax income, and to
limit the adverse effect on earnings due to interest rate changes, Emclaire
monitors interest rate sensitivity through gap and simulation analyses. The
Company's gap model includes certain assumptions based on past experience and
expected customer behavior during periods of rising or falling interest rates.
These assumptions deal primarily with the interest rate changes for deposit
accounts with no fixed maturity, such as savings, NOW and money market accounts.
These assumptions have been developed through consideration of past events
combined with estimates of future pricing practices.
The Company's policy is to limit the adverse change in annual pre-tax income to
5% based on an immediate change in interest rates of 200 basis points. At
December 31, 1997, pre-tax income would be impacted by such a change in interest
rates as follows:
Cuumulative gap at 1 year (7.4%)
Impact on pre-tax earnings
+ 200 basis points (1.4 )
- - 200 basis points
10.9
Liquidity
Liquidity represents the Company's ability to meet normal cash flow requirements
of its customers for the funding of loans and repayment of deposits. Liquidity
is generally derived from the repayments and maturities of loans and investment
securities, and the receipt of deposits. Management monitors liquidity daily,
and on a monthly basis incorporates liquidity management into its
asset/liability program.
32
<PAGE>
Operating activities, as presented in the statement of cash flows in the
accompanying consolidated financial statements, provided $2.1 million in cash
during 1997, generated principally from net income, and depreciation and
amortization, as compared to the $959,000 provided during 1996. The primary
reasons for the increase during 1997 was the increase in net income and the
increased depreciation associated with capital expenditures made by the Company
during the fourth quarter of 1996.
Investing activities consist primarily of loan originations and repayments, and
investment purchases and maturities. These activities used $10.0 million in
funds during 1997, principally for the net funding of loans which totaled $17.8
million for the year. This cash outlay exceeded funds received from investment
repayments and maturities, totaling $9.2 million, and $2.0 million from
securities sales. For 1996, investing activities used $12.5 million, resulting
from $26.2 million in investment securities purchases, which were principally
funded by $12.7 million received in the purchase of the Knox branch office
operation.
Financing activities consisted of the solicitation and repayment of customer
deposits, borrowings and repayments and the payment of dividends. For 1997,
financing activities provided $4.6 million comprised on net deposit increases of
$2.9 million and borrowings of $2.2 million. For 1996, the sale of common stock
provided $2.9 million, while net deposits increased $11.6 million, exclusive of
the funds acquired in the branch purchase.
In addition to using the loan, investment and deposit portfolios as sources of
liquidity, the Company has access to funds from other sources if a need for
additional funds would arise. There are available lines of credit through the
FHLB, along with a federal funds line of credit available through the Bank's
primary correspondent bank. In addition, the Bank has access to funds through
the discount window at the Federal Reserve Bank. The Company also has a ready
source of funds through the available-for-sale component of the investment
securities portfolio. The following table presents the amortized cost of the
investment portfolio, the weighted average, tax equvalent yield and maturities
at December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Available for Sale After 1 Year After 5 Years
Within Within Within After
1 Year 5 Years 10 Years 10 Years Total
------ ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
U. S. Treasury $ 4,503 $ 6,998 $ -- $ -- $11,501
U. S. Government Agency 999 5,010 -- -- 6,009
Obligations of states and
polictical subdivisions -- 1,920 1,697 -- 3,617
Corporate -- 10,067 -- -- 10,067
------- ------- --------- ------- -------
Total $ 5,502 $23,995 $ 1,697 $ -- $31,194
======= ======= ========= ======= =======
Yield 6.08% 6.55% 6.86% - % 6.48%
Held to Maturity
U. S. Treasury $ -- $ 1,006 $ -- $ -- $ 1,006
Obligations of states and polictical
subdivisions 1,390 -- -- -- 1,390
Corporate 904 2,074 -- -- 2,978
Mortgage-backed securities 272 -- -- 411 683
------- ------- --------- ------- -------
Total $ 2,566 $ 3,080 $ -- $ 411 $ 6,057
======= ======= ========= ======= =======
Yield 5.99% 6.19% -- % 6.46% 6.12%
</TABLE>
The following table presents the maturity distribution and interest rate
sensitivity of commercial and industrial loans, and commercial and multi-family
real estate loans at December 31, 1997 (dollars in thousands):
33
<PAGE>
<TABLE>
<CAPTION>
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
------ ------- ------------- -----
<S> <C> <C> <C> <C>
Commercial and industrial $ 6,316 $ 4,414 $ 417 $11,147
Commercial and multi-family real estate 3,002 5,346 6,840 15,188
------- ------- ------- -------
$ 9,318 $ 9,760 $ 7,257 $26,335
======= ======= ======= =======
Predetermined interest rates $ 3,189 $ 6,654 $ 4,237 $14,080
Floating interest rates 6,129 3,106 3,020 12,255
------- ------- ------- -------
$ 9,318 $ 9,760 $ 7,257 $26,335
======= ======= ======= =======
</TABLE>
Generally, commercial loans with maturities of one year or less consist of funds
drawn on commercial lines of credit, short-term notes written with maturities of
ninety days to six months, and demand notes written without alternative maturity
schedules. All lines of credit and demand loans are subject to annual review
where the account may be approved for up to one year. Short-term notes are
generally permitted two renewals, prior to being placed on a fixed repayment
schedule.
The Company anticipates it will have sufficient funds available to meet the
needs of its customers for deposit repayments and loan fundings. At December 31,
1997, loan and letter of credit commitments totaled $9.3 million. Many of these
commitments are in the form of lines of credit and letters of credit which are
available for use by the borrower, but are generally not drawn on. Certificates
of deposit scheduled to mature in one year or less totaled $25.6 million at
December 31, 1997.
Capital Resources
Capital adequacy is the ability of the Company to support growth while
protecting the interests of shareholders and depositors. Bank regulatory
agencies have developed certain capital ratio requirements, which are used to
assist them in monitoring the safety and soundness of financial institutions.
Management continually monitors these capital requirements and believes the
Company to be in compliance with these regulations at December 31, 1997.
The Bank's regulatory capital position at December 31, 1997, as compared to the
minimum regulatory capital requirements imposed on the Bank by banking
regulators at that date is presented in Note 14 of the accompanying financial
statements. Management is not aware of any actions contemplated by banking
regulators which would result in the Bank being in non-compliance with any of
the above requirements.
Impact of Inflation and Changing Prices
The financial statements of the Company and the notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting standards, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
YEAR 2000
The Company formed a committee in September 1997, to implement an action plan
designed to ensure the Company's computer systems, software applications and
other date reliant equipment would function properly after December 31, 1999.
This process involves identifying all equipment, software and third party
providers, deemed to be critical to the Company's daily operations, and
ascertaining if these products or product providers are Year 2000 compliant.
For items or vendors that are not compliant and have not achieved significant
progress toward compliance by October 1, 1998, the committee will implement
contingency plans to either replace the product or vendor, or implement an
alternative procedure to mitigate the affected area.
34
<PAGE>
All software programs used by the Company are purchased directly from vendors,
and are not modified internally by the Company. This eliminates the need for the
direct hiring of programmers to rewrite or modify computer software.
The total cost of this project has not yet been determined, but it is not
expected to have a material impact on the financial condition or results of
operations of the Company. Personnel and other costs resulting from this project
will be expensed as incurred. Expenditures for hardware and software purchases
will be capitalized in accordance with policy.
Management believes that substantially all date reliant equipment and software
will be tested and, if needed, upgraded or replaced by December 31, 1998. In
addition, assessments of significant vendors, service providers and customers
will also be completed. Despite the best efforts of management to address this
issue, the vast number of external entities that have direct and indirect
business relationships with the Company, such as customers, vendors, payment
system providers and other financial institutions, makes it impossible to assure
that a failure to achieve compliance by one or more of these entities would not
have a material adverse impact on the operations of the Company.
COMMON STOCK INFORMATION
Prior to December 1996, there was no established public trading market for the
Company's common stock. In December 1996, the Company began trading its stock in
the local over-the-counter market through the National Association of Securities
Dealers OTC Electronic Bulletin Board. Price quotations from the fourth quarter
of 1996 forward, reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions. The following table
summarizes the high and low prices and dividend information since January 1,
1996, after adjustment for a 5% stock dividend paid in December 1997, and a
4-for-1 stock split effected June 20, 1996. Prices are based upon information
made available to the Company. Cash dividends are declared on a quarterly basis.
<TABLE>
<CAPTION>
1997 1996
---- ----
Dividend Dividend
High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
First Quarter $14.75 $13.25 $.105 $ -- $ -- $.095
Second Quarter 15.00 13.25 .105 11.25 11.25 .105
Third Quarter 16.67 14.28 .114 -- - .105
Fourth Quarter 17.00 16.25 .114 13.50 13.00 .105
</TABLE>
At December 31, 1997, the Company had approximately 590 shareholders of record.
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
Ronald L. Ashbaugh J. Michael King
Retired President Senior Partner
Emclaire Financial Corp. and Lynn, King & Schreffler
Farmers National Bank Attorneys at Law
David L. Cox John B. Mason
President, Emclaire Financial Corp. H.B. Beels & Sons, Inc.
President, Farmers National Bank
Brian C. McCarrier
Bernadette H. Crooks President - Interstate Pipe and Supply
Retired Retailer
Crooks Clothing Elizabeth C. Smith
Retired
George W. Freeman Former Owner-The Inn at Oakmont
Freeman's Tree Farm
Director Emeritus
Rodney C. Heeter
Heeter Lumber, Co. Dr. Clinton R. Coulter
Retired Medical Doctor
Robert L. Hunter
Hunter Truck Sales and Service The above listed persons are members of the Boards
Hunter Leasing of Directors of both the Company and the Bank.
EXECUTIVE OFFICERS
Emclaire Financial Corp. Farmers National Bank
David L. Cox David L. Cox
President and Chief Executive Officer President and Chief Executive Officer
Ronald L. Larimore Ronald L. Larimore
Secretary Vice President/Cashier and
Chief Operations Officer
John J. Boczar, CPA
Treasurer John J. Boczar, CPA
Vice President and Chief Financial Officer
Robert W. Foust
Vice President and Branch Administrator
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
OTHER OFFICERS
Edith M. Beckwith Allan I. Johnson Fred S. Port
Manager - Eau Claire Manager - Knox Manager - Clarion
Scott B. Daum James W. LeVier Joseph M. Sporer
Manager - Human Resources Assistant Vice President Assistant Vice President
Compliance Officer Manager - Consumer Loans
Janice F. Dittman
Manager - Data Processing Thomas E. McFadden Robert A. Vernick
Assistant Vice President Assistant Vice President
Cindy L. Elder Assistant Cashier Manager - Bon Aire
Assistant Vice President
Manager - Emlenton Troy J. Moore
Acting Manager - East Brady
</TABLE>
<PAGE>
ANNUAL MEETING
The Annual Meeting of Shareholders of Emclaire Financial Corp. will be held at
the Farmers National Bank Data Processing Center, 708 Main Street, Emlenton,
Pennsylvania, on Wednesday, May 20, 1998 at 7:00 p.m.
ADDITIONAL FINANCIAL INFORMATION
A copy of Emclaire Financial Corp.'s Annual Report on Form 10-KSB, as filed with
the Securities and Exchange Commission, will be furnished, free of charge, upon
written request to John J. Boczar, Treasurer, Drawer D, Emlenton, PA,
16373-0046.
The Annual Report and other Company reports are also filed electronically
through the Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR")
which performs automated collection, validation, indexing, acceptance, and
forwarding of submissions to the Securities and Exchange Commission and is
accessible to the public by using the Internet at
http://www.sec.gov/edgarhp.htm.
TRANSFER AGENT
Emclaire Financial Corp.
612 Main Street
P.O. Drawer D
Emlenton, PA 16373
(724) 867-2311
Emclaire Financial Corp. common stock is quoted on the OTC Electronic Bulletin
Board under the symbol "EMCF". The following companies act as market makers:
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
(800) 646-8647
E. E. Powell & Co., Inc.
1100 Gulf Tower
Pittsburgh, PA 15219
(412) 391-4594
F. J. Morrissey & Co., Inc.
1700 Market Street - Suite 1420
Philadelphia, PA 19103
(215) 563-8500
Ryan Beck & Co.
80 Main Street
West Orange, NJ 07052
(201) 325-3200
BRANCH OFFICE LOCATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Emlenton Eau Claire Clarion - 2 Locations Knox - 2 Locations
612 Main Street 207 S. Washington Street Sixth & Wood Streets Rt. 338 South
Emlenton, PA 16373 Eau Claire, PA 16030 Clarion, PA 16214 Knox, PA 16232
(724) 867-2311 (724) 791-2591 (814) 226-7523 (814) 797-2200
and and
East Brady Butler
323 Broad Street Bon Aire Plaza Clarion Mall Main & State Streets
East Brady, PA 16028 1101 North Main Street I-80 and Rt. 68 Knox, PA 16232
(724) 526-5793 Butler, PA 16003 Clarion, PA (814) 797-1136
(724) 283-4666 (814) 226-7488
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information derived from the
annual report on Form 10KSB40 and is qualified in its entirety by
reference to such financial information.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,947
<INT-BEARING-DEPOSITS> 28
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,977
<INVESTMENTS-CARRYING> 6,057
<INVESTMENTS-MARKET> 6,053
<LOANS> 86,144
<ALLOWANCE> 874
<TOTAL-ASSETS> 133,956
<DEPOSITS> 117,655
<SHORT-TERM> 200
<LIABILITIES-OTHER> 540
<LONG-TERM> 2,063
0
0
<COMMON> 1,352
<OTHER-SE> 12,146
<TOTAL-LIABILITIES-AND-EQUITY> 133,956
<INTEREST-LOAN> 6,969
<INTEREST-INVEST> 2,464
<INTEREST-OTHER> 90
<INTEREST-TOTAL> 9,523
<INTEREST-DEPOSIT> 3,655
<INTEREST-EXPENSE> 3,727
<INTEREST-INCOME-NET> 5,796
<LOAN-LOSSES> 220
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,382
<INCOME-PRETAX> 1,790
<INCOME-PRE-EXTRAORDINARY> 1,244
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,244
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.78
<LOANS-NON> 820
<LOANS-PAST> 171
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 733
<CHARGE-OFFS> 108
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 874
<ALLOWANCE-DOMESTIC> 374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 500
</TABLE>
