SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(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, 1998,
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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
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. $12,136,000
As of March 19, 1999, there were issued and outstanding 1,395,852 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 March 15, 1999, was $22,507,791 ($19.75 per share based
on 1,139,635 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, 1998. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
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PART I
Item 1. Description of Business
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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. In March 1998, an eighth
office was opened in the Clarion Mall. On August 31, 1998, the Company completed
the acquisition of Peoples Savings Financial Corporation and its wholly-owned
subsidiary Peoples Savings Bank. The three offices of Peoples Savings Bank,
located in Ridgway, DuBois and Brookville, now operate as branch offices of the
Bank. See note in the audited consolidated financial statements included in the
Annual Report and incorporated herein by reference.
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 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.
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One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured
by one-to-four family residences located in the Bank's primary lending area.
Typically such residences are single family owner occupied units. The Bank is an
approved, qualified lender for the Federal Home Loan Mortgage Corporation
("FHLMC"). As a result, the Bank may sell loans to and service loans for the
FHLMC. While the Bank has made no such sales to date, it anticipates the ability
to sell loans to the FHLMC will allow it to minimize the interest rate risk
associated with longer term fixed rate mortgages.
Home Equity Loans. The Bank originates home equity loans secured by
single-family residences. These loans may be either a single advance fixed rate
loan with a term of up to 15 years, or a variable rate revolving line of credit.
These loans are made only on owner-occupied single-family residences.
Commercial and Commercial Real Estate Loans. Commercial lending constitutes a
significant portion of the Bank's lending activities comprising a combined total
of 24.3% of the total loan portfolio at December 31, 1998. 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, 1998, the Bank's loans-to-one borrower limit based upon 15% of
unimpaired capital was $2.5 million. At December 31, 1998, the Bank's largest
aggregation of loans to one borrower was approximately $1,999,000 of loans
secured by commercial real estate and equipment. At December 31, 1998, 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.
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Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
investing activities. Secondary sources of funds are derived from loan
repayments and investment maturities. Loan repayments can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates and general market conditions. The Bank also has access to
funds through credit facilities available from the Federal Home Loan Bank
("FHLB") and through its primary correspondent bank. In addition, the Bank can
obtain advances from the Federal Reserve Bank discount window. For a description
of the Bank's sources of funds see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report incorporated
herein by reference.
Deposits. The Bank offers a wide variety of retail deposit account products to
both consumer and commercial deposit customers, including time deposits,
non-interest bearing and interest bearing demand deposit accounts, savings
deposits, and money market accounts.
Deposit products are promoted in periodic newspaper and radio advertisements,
along with notices provided in customer account statements. The Bank's market
strategy is based on its reputation as a community bank that provides quality
products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. Interest rates on deposits are reviewed weekly by management, who
considers a number of factors including (1) the Bank's internal cost of funds;
(2) rates offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Bank, a national association.
As of December 31, 1998, the Bank had no subsidiaries.
Personnel
At December 31, 1998, the Bank had 88 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, Butler, Clarion, Clearfield, Elk, Jefferson 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.
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The Bank competes for loans by charging competitive interest rates and nominal
fees, along with providing efficient and comprehensive service to loan
customers.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both federal
and state law. Set forth below is a summary description of certain provisions of
certain laws which relate to the regulation of the Company and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
Regulation - The Company
The Company, as a registered bank holding company, is subject to regulation
under the BHCA. The Company is required to file quarterly reports and annual
reports with the Federal Reserve Board ("FRB") and such additional information
as the FRB may require pursuant to the BHCA. The FRB may conduct examinations of
the Company and its subsidiaries.
The FRB may require that the Company terminate an activity or terminate control
of or liquidate or divest certain subsidiaries or affiliates when the FRB
believes the activity or the control of the subsidiary or affiliate constitutes
a significant risk to the financial safety, soundness, or stability of any of
its banking subsidiaries. The FRB also has the authority to regulate provisions
of certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances, the
Company must file written notice and obtain approval from the FRB prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the FRB, a bank holding company and
its nonbanking subsidiaries are prohibited from requiring certain tie-in
arrangements in connection with any extension of credit, lease, or sale of
property or furnishing of services. Further, the Company is required by the FRB
to maintain certain levels of capital. Because the Company has less than $150
million in assets on a consolidated basis, the capital levels of the Bank are
deemed by the FRB to be the capital levels of the Company. For additional
information on the capital levels of the Bank, see "- Regulation - The Bank";
and "Management's Discussion and Analysis - Liquidity and Capital Resources -
Capital Resources" in the Annual Report incorporated herein by reference.
The Company is required to obtain the prior approval of the FRB for the
acquisition of more than 5% of the outstanding shares of any class of voting
securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the FRB is also required for the merger or
consolidation of the Company and another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or furnishing services to
its subsidiaries. However, the Company, subject to the prior approval of the
FRB, may engage in any activities, or acquire shares of companies engaged in
activities that are deemed by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Bank holding companies and their subsidiary banks are subject to the provisions
of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms
and the provisions of the CRA, the
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Bank's record in meeting the credit needs of the community served by the Bank,
including low- and moderate-income neighborhoods, is generally annually assessed
by the OCC. When a bank holding company applies for approval to acquire a bank
or other bank holding company, the Federal Reserve will review the assessment of
each subsidiary bank of the applicant bank holding company, and such records may
be the basis for denying the application. At March 6, 1996, the Bank was rated
"Satisfactory" with respect to the CRA.
Under FRB regulations, a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the FRB's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB's regulations or both. This doctrine has become known as
the "source of strength" doctrine. The validity of the source of strength
doctrine has been and is likely to continue to be the subject of litigation
until definitively resolved by the courts or by Congress.
Regulation - The Bank
General - The Bank is subject to supervision and examination by the OCC and to
certain regulations of the FDIC, and the FHLB. The Bank is also subject to
various requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types,
amount and terms and conditions of loans that may be granted and limitations on
the types of investments that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect the operations of the
Bank.
Dividend Restrictions - Dividends from the Bank constitute the principal source
of income to the Company. The Bank is subject to various statutory and
regulatory restrictions on its ability to pay dividends to the Company. Under
such restrictions, the amount available for payment of dividends to the Company
by the Bank totaled approximately $748,000 at December 31, 1998. 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.
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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, ranging between 0 to 27 basis points, approximately 6.4 basis
points. Deposits acquired by the Bank in the acquisition of Peoples Savings Bank
are assessed at the SAIF rate for FICO Bond Retirement. 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.
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, 1998, 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
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requirements could subject a bank to a variety of enforcement remedies available
to federal bank regulatory agencies.
At December 31, 1998, the Bank's respective total and Tier 1 risk-based capital
ratios and leverage ratios exceeded the minimum regulatory requirements. See
Note 14 in the audited consolidated financial statements included in the Annual
Report and incorporated herein by reference.
Legislative Proposals and Reforms
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by U.S. Congress.
In the last Congress, such proposals included legislation to revise the BHCA to
expand permissible activities for banks, principally to facilitate the
convergence of commercial and investment banking. Certain proposals also sought
to expand insurance activities of banks. It is unclear whether any of these
proposals, or any form of them, will be reintroduced in the current Congress and
become law. Consequently, it is not possible to determine what effect, if any,
they may have on the Company and the Bank.
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 eleven offices located in Venango,
Butler, Clarion, Clearfield, Elk, and Jefferson counties, Pennsylvania. The
Bank's total investment in office property and equipment was $5.6 million with a
net book value of $3.6 million at December 31, 1998.
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Main Office Eau Claire Office Clarion Office
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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
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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
Clarion Mall Office Ridgway Office DuBois Office Brookville Office
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Clarion Mall, Room 400 173 Main Street 17 W. Long Avenue 263 Main Street
RD 3 Ridgway, Pennsylvania DuBois, Pennsylvania Brookville, Pennsylvania
Clarion, Pennsylvania Elk County Clearfield County Jefferson County
Clarion County
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All offices are owned by the Bank, except for the Bon Aire, Knox 338, Clarion
Mall and DuBois 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
commencing in 1996 with three (3) options to renew. The Clarion Mall office is
leased for 5 years with two (2) options to renew. The DuBois office is leased on
a month-to-month basis. The Bank also maintains a remote ATM facility located in
a supermarket in East Brady.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's investment
policies and any regulatory or Board of Directors' percentage of assets
limitations regarding certain investments. All of the Bank's investment policies
are reviewed and approved by the Board of Directors of the Bank, and such
policies, subject to regulatory restrictions (if any), can be changed without a
vote of stockholders. The Bank's investments are primarily acquired to produce
income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities," "Item 1. Business - Regulation of the Bank," and
"Item 2. Description of Property - (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities" and "Item 1. Business - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities," "Item 1.
Business - Regulation of the Bank," and "Item 1. Business - Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
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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
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No matters were submitted to stockholders for a vote during the quarter ended
December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
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The information contained under the section captioned "Common Stock Information"
in the Company's Annual Report for the fiscal year ended December 31, 1998, is
incorporated herein by reference.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
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with Section 16(b) of the Exchange Act
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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
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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
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(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.
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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.
3.1 Articles of Incorporation of Emclaire Financial Corp. *
3.2 Bylaws of Emclaire Financial Corp. *
4 Specimen Stock Certificate of Emclaire Financial Corp. ***
10 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,
1998.
21 Subsidiaries of the Registrant (see information contained herein under
"Business - Subsidiary Activity").
27 Financial Data Schedule ****
(b) Reports on Form 8-K.
None
- ---------------------
* 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.
*** Incorporated by reference to the Registrant's Annual Report on 10-KSB for
the year ended December 31, 1997.
*** 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 31, 1999 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.
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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 31, 1999 Date: March 31, 1999
By: /s/ Ronald L. Ashbaugh By: /s/ Brian C. McCarrier
--------------------------------------------- ----------------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 31, 1999 Date: March 31, 1999
By: /s/ Bernadette H. Crooks By: /s/ George W. Freeman
--------------------------------------------- ----------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: March 31, 1999 Date: March 31, 1999
By: /s/ Rodney C. Heeter By:
--------------------------------------------- ----------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: March 31, 1999 Date:
By: /s/ J. Michael King By: /s/ John B. Mason
--------------------------------------------- ----------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 31, 1999 Date: March 31, 1999
By:
---------------------------------------------
Elizabeth C. Smith
Director
Date:
12
</TABLE>
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended December 31, 1998
<PAGE>
1998
ANNUAL REPORT
[GRAPHIC OMITTED]
<PAGE>
The Cover
Elk County Courthouse - Ridgway, PA
The construction of the Elk County Courthouse commenced with a cornerstone
laying ceremony on July 16, 1879 and was completed on December 28, 1880. Costs
of construction totaled approximately $65,000, including the bell tower and
clock. At the time of completion, it was noted the construction costs
represented $4.96 for every resident of the county.
The building was designed by J. P. Marston, and is modeled after the Warren
County Courthouse, for which Marston was also the architect and builder. The
original masonry structure, constructed of brick and sandstone taken from the
hills surrounding Ridgway, stood approximately 110 feet by 64 feet. The tower
was topped with a zinc statue of the Goddess of Justice which stood 130 feet
above street level.
Since its completion in 1880 the courthouse has undergone a number of
renovations and improvements. From the addition of the law library in 1894 to an
extensive renovation in 1970, attempts have been made to improve and enhance the
structure. In 1994, the Centennial Building adjacent to the courthouse was
purchased and renovated from 1995 to 1997 into the Courthouse Annex.
Acknowledgment: Cover Photograph: Elk County Courthouse, circa 1910;
Courtesy of The Elk County Historical Society
<PAGE>
[OBJECT OMITTED]
Emclaire Financial Corp.
1998 ANNUAL REPORT
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 36
<PAGE>
Dear stockholders and friends:
As we reflect on the year 1998, we can honestly say "here we grow again". We
began with the addition of our Clarion Mall Office in March, and continued with
the purchase of Peoples Savings Bank, with offices in Ridgway, Brookville, and
DuBois. The three former offices of Peoples were integrated into our system as
of the end of August. Our branching network now covers six counties and consists
of eleven offices. The growth encountered over the past year has offered us new
markets for our type of community banking.
During 1998, we erected a new data processing facility on Main Street in
Emlenton. This facility, which we occupied in August, offers us the ability to
service our branching network now and in the future. In addition to the new
building, we replaced our computer with a new enterprise server and upgraded our
software. We also purchased a new check sorter and imaging system. The new
system allows us to be more efficient and gives our customers the added
convenience of check imaging. Year 2000 issues were a major factor in our
conversion to the new system at this time. All our testing and verification of
the new system, which was completed at the beginning of 1999, indicates that our
systems are ready for the new millennium.
Growth and expansion has not come without its challenges. Since 1995 our bank
has almost doubled in asset size, growing from $98.6 million, year end 1995, to
$194.1 million, year end 1998. During this same period, we increased our number
of offices from four branches, serving three counties, to eleven branches,
serving six counties. With the purchase of Peoples Savings Bank, we also added
270 shareholders and now have 747 shareholders of record. We would like to
welcome those new members to our banking family.
Total assets increased to $194.1 million for 1998, which amounted to a 44.9%
increase. Total deposits increased $52.2 million or 44.4%. Although the purchase
of Peoples Savings Bank accounted for a major portion of this increase, our
other nine offices showed an impressive 15% deposit growth rate for 1998. This
is a direct reflection of the dedication of our employees and their efforts
throughout the Bank. Stockholders' equity at December 31, 1998 amounted to $21.1
million. This represented a 56.3% or $7.6 million increase from the prior year.
This increase was attributed mainly to the purchase transaction of Peoples
Savings Bank. Net income increased by 6.4% for the year, which equated to a per
share earning of $1.12.
As previously stated, growth presents many new challenges for management,
employees and the Board of Directors. Over the past five years we have been able
to expand into new markets and increase our market share in existing markets. We
have accomplished this through branch purchases, de novo branches, Peoples
Savings Bank purchase, and normal deposit growth. The challenge that faces us in
the future will be to profitably increase our market share. We will only be able
to succeed in this endeavor if we have the assistance of our employees.
The next twelve months will be spent reviewing our organizational structure,
developing our employees, and increasing our customer service. To this end, we
have solicited the services of J. L. Nick & Associates, Inc., a human resource
consulting firm from Erie, Pennsylvania. They will be developing our human
resource function and employee training program, while also aiding us with
organizational analysis. Our employees are one of our most valuable assets. In
order to properly manage the growth we have experienced, we must recruit,
develop, and train the best employees.
During the next five years our Bank will have many opportunities that will
present unique challenges. The banking philosophy we have developed over the
past years will serve us well into the future. Concern for our customers,
employees, and shareholders will be paramount to our success. I would like to
invite every shareholder to attend the annual meeting on May 10, 1999 to be held
at our Data Center in Emlenton. Please feel free to come and discuss the future
of our organization.
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,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest income $ 11,343 $ 9,523 $ 8,098 $ 7,437 $ 6,751
Interest expense 4,669 3,727 3,352 2,986 2,573
-------------- ------------- ------------- ------------- -------------
Net interest income 6,674 5,796 4,746 4,451 4,178
Provision for loan losses 200 220 120 143 132
-------------- ------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 6,474 5,576 4,626 4,308 4,046
Other income 793 596 427 389 384
Other expense 5,354 4,382 3,636 3,005 2,899
-------------- ------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect adjustment 1,913 1,790 1,417 1,692 1,531
Applicable income tax expense 590 546 436 520 454
-------------- ------------- ------------- ------------- -------------
NET INCOME $ 1,323 $ 1,244 $ 981 $ 1,172 $ 1,077
============== ============= ============= ============= =============
PER SHARE DATA (1)
Earnings per share $ 1.12 $ 1.15 $ 1.15 $ 1.40 $ 1.28
Dividends paid $ .50 $ .44 $ .41 $ .43 $ .38
Book value per share at period end $ 15.12 $ 12.48 $ 11.68 $ 10.76 $ 9.72
Average number of shares outstanding 1,186,540 1,081,453 852,403 839,160 839,160
STATEMENT OF CONDITION STATISTICS
(At end of period)
Assets $194,132 $133,956 $128,002 $ 98,599 $ 96,714
Deposits 169,870 117,655 114,725 88,944 87,986
Loans 134,249 86,144 68,428 64,322 64,086
Allowance for loan losses 1,336 874 733 687 688
Federal funds sold 9,700 - 3,500 2,500 900
Investment securities 32,321 38,034 46,483 26,361 25,436
Stockholders' equity 21,101 13,498 12,631 9,032 8,155
SIGNIFICANT RATIOS
Return on average equity 8.08% 9.57 % 10.33 % 13.56 % 13.80 %
Return on average assets 0.85 .96 .89 1.20 1.12
Net yield on earning assets 4.70 4.87 4.68 4.97 4.81
Net loans as a percent of deposits 78.24 72.47 59.01 71.55 72.05
Equity to assets at period end 10.87 10.08 9.87 9.16 8.43
Earning average assets to total assets 92.82 93.10 93.63 94.11 92.84
Average interest bearing liabilities to assets 74.47 74.71 77.02 77.26 78.36
Dividends as a percent of net income 44.64 38.26 35.65 30.71 29.69
Allowance for loan losses to total loans 1.00 1.01 1.07 1.07 1.07
Full time equivalent employees 88 75 74 52 47
Banking offices 11 7 7 4 4
</TABLE>
(1) - Adjusted for a 5% stock dividend in 1997, and a 4-for-1 stock split in
1996.
2
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,989 $ 4,975
Federal funds sold 9,700 -
Time deposits with other financial institutions 100 -
Investment securities (Note 4):
Available for sale 28,929 31,977
Held to maturity (estimated market value
of $3,419 and $6,053) 3,392 6,057
Loans (Note 5) 134,249 86,144
Less allowance for loan losses (Note 6) 1,336 874
-------- --------
Net loans 132,913 85,270
Premises and equipment (Note 7) 3,625 2,619
Accrued interest and other assets 6,484 3,058
-------- --------
TOTAL ASSETS $194,132 $133,956
======== ========
LIABILITIES
Deposits
Noninterest bearing demand $ 24,746 19,765
Interest bearing demand 22,026 17,276
Savings 22,527 16,261
Money market 21,381 18,077
Time (Note 8) 79,190 46,276
-------- --------
Total deposits 169,870 117,655
Obligation under capital lease 19 63
Borrowed funds (Note 12) 2,000 2,200
Accrued interest and other liabilities 1,142 540
-------- --------
TOTAL LIABILITIES 173,031 120,458
-------- --------
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; 1,395,852
and 1,081,453 shares issued in
1998 and 1997, respectively 1,745 1,352
Additional paid-in capital 10,871 4,432
Retained earnings 8,192 7,492
Net unrealized gain on securities 293 222
-------- --------
TOTAL STOCKHOLDERS' EQUITY 21,101 13,498
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $194,132 $133,956
======== ========
</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,
1998 1997
---------------- ----------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 8,943 $ 6,969
Interest bearing deposits in other banks 41 1
Federal funds sold 226 89
Investment securities:
Taxable 1,940 2,279
Exempt from federal income tax 193 185
---------------- ----------------
Total interest income 11,343 9,523
---------------- ----------------
INTEREST EXPENSE
Deposits 4,550 3,655
Borrowed funds 117 67
Lease obligation 2 5
---------------- ----------------
Total interest expense 4,669 3,727
---------------- ----------------
NET INTEREST INCOME 6,674 5,796
Provision for loan losses 200 220
---------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,474 5,576
---------------- ----------------
OTHER OPERATING INCOME
Service fees on deposit accounts 551 476
Other 242 120
---------------- ----------------
Total other operating income 793 596
---------------- ----------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,474 2,240
Occupancy, furniture and equipment 938 688
Other (Note 9) 1,942 1,454
---------------- ----------------
Total other operating expense 5,354 4,382
---------------- ----------------
Income before income taxes 1,913 1,790
Income taxes (Note 10) 590 546
---------------- ----------------
NET INCOME $ 1,323 $ 1,244
================ ================
EARNINGS PER SHARE $ 1.12 $ 1.15
AVERAGE SHARES OUTSTANDING 1,186,540 1,081,453
</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 Gains on
Stock Capital Earnings Securities Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,288 $ 3,622 $ 7,597 $ 124 $ 12,631
Comprehensive income:
Net income 1,244 1,244
Other comprehensive income, net
Unrealized gains on
securities of $148 98 98
-------
Total comprehensive income 1,342
Dividends declared
($.44 per share) (474) (474)
Five percent stock dividend including
fractional shares cash paid (Note 15) 64 810 (875) (1)
----- ----- -------- ------ ------
Balance, December 31, 1997 1,352 4,432 7,492 222 13,498
Comprehensive income:
Net income 1,323 1,323
Other comprehensive income, net
Unrealized gains on
securities of $108 71 71
------
Total comprehensive income 1,394
Dividends declared ($.50 per share) (623) (623)
Issuance of 314,399 shares of
common stock in acquisition
transaction (Note 3) 393 6,439 6,832
------- -------- -------- ------ -------
Balance, December 31, 1998 $ 1,745 $ 10,871 $ 8,192 $ 293 $ 21,101
======= ======= ======= ====== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,323 $ 1,244
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 788 598
Net amortization of investment security
discounts and premiums 147 198
Provision for loan losses 200 220
Deferred income taxes (47) (3)
Decrease in accrued interest receivable 21 102
Increase (decrease) in accrued interest payable (113) 2
Other, net (170) (250)
----------------- -----------------
Net cash provided by operating activities 2,149 2,111
----------------- -----------------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 5,500 5,000
Held to maturity 2,623 4,157
Proceeds from sales of investment securities:
Available for sale - 1,990
Purchases of investment securities:
Available for sale (1,903) (2,748)
Net loan originations (12,395) (17,813)
Purchases of premises and equipment (1,118) (588)
Proceeds from sales of premises and equipment - 10
Proceeds from sale of foreclosed assets 343 -
Net proceeds from acquisition (Note 3) 2,232 -
----------------- -----------------
Net cash used for investing activities (4,718) (9,992)
----------------- -----------------
FINANCING ACTIVITIES
Net increase in deposits 17,150 2,930
Increase (decrease) in short-term borrowings (200) 200
Proceeds from borrowed funds - 2,000
Payments for obligation under capital lease (44) (41)
Cash dividends paid, including fractional shares (623) (475)
----------------- -----------------
Net cash provided by financing activities 16,283 4,614
----------------- -----------------
Increase (decrease) in cash and cash equivalents 13,714 (3,267)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,975 8,242
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,689 $ 4,975
================= =================
</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 real estate, commercial and
consumer loans, as well as a variety of deposit services offered to its
customers through eleven 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 balance sheet date 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's
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 the Company will
be unable to collect principal or interest due according to the contractual
terms of the loan. Loan impairment is
7
<PAGE>
measured based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
Residential mortgage loans and consumer loans are large groups of smaller
balance homogenous loans and are measured for impairment collectively. Loans
that experience insignificant payment delays are, generally not classified as
impaired. The significance of payment delays is determined on a case by case
basis, considering the length of the delay, the prior payment record, the amount
of the shortfall, and the principal and interest owed
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 Owned
- -----------------------
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
- -----------------
Goodwill is the excess cost over net tangible assets and identified intangible
assets acquired through purchase acquisitions. This intangible asset, included
in other assets and totaling $3,218,000 and $683,000, at December 31, 1998 and
1997, respectively is amortized using the straight-line method over a period not
to exceed 25 years. Core deposit intangible premiums totaling $1,063,000 and
$655,000 at December 31, 1998 and 1997, respectively, are included in other
assets and are amortized on a straight-line basis over the average remaining
lives of the acquired deposits, not to exceed eight years. Goodwill and other
intangible assets are periodically reviewed for possible impairment.
Pension Plan
- ------------
The Bank maintains a noncontributory 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.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement defines
comprehensive income as net income as currently reported, as well as certain
changes in assets and liabilities, such as unrealized gains and losses on
investment securities available for sale. Statement 130 requires the presentment
of comprehensive income and its components in a full set of general purpose
financial statements. The Company has elected to report the effects of Statement
130 as part of the Consolidated Statement of Changes in Stockholders' Equity.
Earnings Per Share
- ------------------
The Company maintains a simple capital structure; therefore, there are no
dilutive effects on earnings per share. As such, earnings per share computations
are based on the weighted average number of shares outstanding of 1,186,540 and
1,081,453 for 1998 and 1997, respectively.
Cash Flow Information
- ---------------------
The Company has defined cash equivalents as those amounts included in due from
banks and federal funds sold.
8
<PAGE>
Cash payments for interest in 1998 and 1997 were $4,571,000 and $3,725,000,
respectively. Cash payments or income taxes in 1998 and 1997 were $608,000 and
$625,000, respectively.
Assets acquired, net of cash, and liabilities assumed in the acquisition of
Peoples Savings Financial Corporation amounted to $40,289,000 and $35,689,000.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Employer's Disclosures About Pension and Other Post Retirement Benefits
- -----------------------------------------------------------------------
In February 1998, the Financial Accounting Standards Board issued Statement No.
132 "Employer's Disclosures about Pensions and Other Post Retirement Benefits."
This statement revised employers' disclosures pertaining to pension and other
post retirement benefits, by standardizing the disclosure requirements for
pension and other post retirement benefits to the extent practicable; and by
requiring additional information on changes in the benefit obligations and the
fair value of plan assets to facilitate financial analysis. This statement
requires changes in disclosure only, and its adoption had no effect on the
financial condition, results of operation, or liquidity of the company
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities", requiring that
derivative instruments be carried at fair value on the balance sheet. The
statement allows for the continued use of derivatives to hedge various risks,
and sets forth specific criteria to be used to determine when hedge accounting
should be used. The statement also provides for offsetting changes in fair value
or cash flows of both the derivatives and the hedged asset or liability to be
recognized in earnings in the same period.
This statement becomes effective for interim and annual reporting beginning
January 1, 2000. The impact on the financial position and results of operations
of the Company in adopting this statement are not currently determinable.
3. ACQUISITION
On August 31, 1998, the Company completed the acquisition of Peoples Savings
Financial Corporation ("Peoples"), in a transaction accounted for as a purchase.
This transaction was consummated through the issuance of 314,399 shares of
Emclaire common stock and a cash payment of $5,684,000, and was valued at
approximately $12.6 million. Under the terms of the Agreement and Plan of
Reorganization, Peoples' wholly-owned subsidiary, Peoples Savings Bank, was
merged into and became part of the Bank. The results of operations for the three
branch offices acquired in this transaction are included in the accompanying
financial statements since the date of acquisition. As a result of this
transaction, total consolidated assets increased approximately $42.1 million,
including net fair value and identifiable intangible asset adjustments of
$917,000, and goodwill of $2.6 million. The fair value adjustments and
identifiable intangible assets are being amortized over two to twenty years. The
resulting goodwill is being amortized over 25 years..
The following summarizes unaudited pro forma information, assuming the merger
had occurred January 1, 1997:
1998 1997
----------- ----------
Net interest income $ 7,402 $ 7,009
=========== ==========
Net income $ 707 $ 1,136
=========== ==========
Earnings per share $ 0.51 $ 0.81
=========== ==========
This proforma information does not purport to be indicative of the results of
operations which would have resulted had the acquisition been consummated on the
date assumed.
9
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Available for Sale 1998
--------------------------------------------------------------------
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 $ 12,001 $ 203 $ - $ 12,204
Obligations of states and political
subdivisions
4,252 65 - 4,317
Corporate notes
9,971 192 - 10,163
Mortgage-backed securities 9 - - 9
------ ------ ----- ------
Total debt securities 26,233 460 - 26,693
Marketable equity securities including
equity investments in Federal Reserve
and Federal Home Loan Banks 2,252 - (16) 2,236
------ ------ ----- ------
Total $ 28,485 $ 460 $ (16) $ 28,929
====== ====== ===== ======
Held to Maturity 1998
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 1,003 $ 19 $ - $ 1,022
Corporate notes 2,044 18 - 2,062
Mortgage-backed securities 345 - (10) 335
------ ------ ----- ------
Total $ 3,392 $ 37 $ (10) $ 3,419
====== ====== ===== ======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Available for Sale 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 $ 17,510 $ 163 $ (1) $ 17,672
Obligations of states and political
subdivisions 3,617 43 - 3,660
Corporate notes 10,067 134 (3) 10,198
------- ------- -------- ---------
Total debt securities 31,194 340 (4) 31,530
------- ------- -------- ---------
Equity investment in Federal Reserve
and Federal Home Loan Banks 447 - - 447
------- ------- -------- ---------
Total $ 31,641 $ 340 $ (4) $ 31,977
========== ========= ========= ==========
Held to Maturity 1997
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 1,006 $ 7 $ - $ 1,013
Obligations of states and political
subdivisions 1,390 1 - 1,391
Corporate notes 2,978 10 (3) 2,985
Mortgage-backed securities 683 - (19) 664
------- ------- -------- ---------
Total $ 6,057 $ 18 $ (22) $ 6,053
========== ======== ========= ==========
</TABLE>
No sales of securities were transacted during 1998. Proceeds from the sale of
investment securities classified as available for sale totaled $1,990,000 for
1997. No gains or losses resulted from these sales.
Investment securities with a carrying value of approximately $5,779,000 and
$5,738,000 at December 31, 1998 and 1997, 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,
1998, 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.
11
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 7,824 $ 7,879 $ 1,017 $ 1,024
Due after one year through five years 16,954 17,340 2,030 2,060
Due after five years through ten years 1,455 1,474 - -
After ten years - - 345 335
----------- ----------- ---------- ----------
Total $ 26,233 $ 26,693 $ 3,392 $ 3,419
=========== =========== =========== ==========
</TABLE>
5. LOANS
Major classifications of loans are summarized as follows (in thousands):
1998 1997
---- ----
Commercial and industrial $ 14,223 $ 11,147
Real estate mortgages
Residential 87,137 45,709
Commercial and other 18,381 15,188
Consumer 14,508 14,100
------- -------
134,249 86,144
Less allowance for loan losses 1,336 874
------- -------
Total $ 132,913 $ 85,270
=========== ===========
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 $167,000 and $197,000 at December 31, 1998
and 1997, 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, 1998, is as follows (in thousands):
Repayments
1997 New Loans and Other 1998
---- ---------- ---------- ----
$1,168 864 515 $1,517
The Bank's primary business activity is with customers located within Venango,
Butler, Clarion, Clearfield, Elk and Jefferson Counties. Commercial, residential
and personal loans are granted. Although the Bank has a diversified loan
portfolio at December 31, 1998 and 1997, 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):
1998 1997
---- ----
Balance, January 1 $ 874 $ 733
Allowance related to loans acquired 349 -
Provision 200 220
Recoveries 26 29
Charge-offs (113) (108)
-------- --------
Balance, December 31 $ 1,336 $ 874
======== =========
At December 31, 1998 and 1997, the recorded investment in loans which are
considered to be impaired was $515,000 and $685,000, respectively, all of which
was placed in nonaccrual status. In addition, $40,000 and $70,000 of the related
allowance for loan losses has been allocated for these impaired loans at
December 31, 1998 and 1997, respectively. There were also commitments for
unfunded letters of credit totaling $7,500, to a borrower with outstanding loans
considered to be impaired, in both years. The average recorded investment in
impaired loans during the years ended December 31, 1998 and 1997, was
approximately $575,000 and $719,000, respectively. No interest income was
recognized on impaired loans during 1998. Interest income totaling $14,000 was
recognized on impaired loans in 1997, 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):
1998 1997
---- ----
Land and improvements $ 304 $ 256
Buildings 2,752 1,431
Construction in process - 489
Leasehold improvements 183 148
Furniture and fixtures 2,343 1,695
------ ------
5,582 4,019
Less accumulated depreciation 1,957 1,400
------ ------
Total $ 3,625 $ 2,619
======== =======
Depreciation and amortization charged to operations was $365,000 in 1998 and
$272,000 in 1997.
8. TIME DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $10,397,000 and $4,328,000 at December 31, 1998
and 1997, respectively. The following schedule presents the contractual
maturities for time deposits in excess of $100,000 at December 31, 1998 (in
thousands):
13
<PAGE>
Within three months $ 1,914
After three months through six months 2,198
After six months through one year 2,072
After one year 4,213
Total $ 10,397
==========
9. OTHER EXPENSES
The following is an analysis of other expense (in thousands):
1998 1997
---------- ----------
Software amortization $ 122 83
Postage 135 140
ATM and debit card processing 136 96
Telephone 186 105
Printing and supplies 228 138
Amortization of intangible assets 301 243
Other 834 649
---- ----
Total $ 1,942 $ 1,454
========= ==========
10. INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
1998 1997
--------- ---------
Currently payable $ 637 $ 549
Deferred (47) (3)
--------- ---------
Total $ 590 $ 546
========= =========
The reconciliation between the federal statutory rate and the Company's
effective income tax rate is as follows (dollars in thousands):
14
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
% of Pre-Tax % of Pre-Tax
Amount Income Amount Income
------ ------ ------ ------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 650 34.0% $ 609 34.0%
Effect of tax exempt income (86) (4.5) (76) (4.2)
Goodwill 12 0.6 - 0.0
Other 14 0.7 13 0.7
--------- ------- --------- --------
Total $ 590 30.8% $ 546 30.5%
========= ======= ========= ========
</TABLE>
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):
1998 1997
---- ----
Deferred tax assets:
Provision for loan losses $ 399 $ 244
Other real estate owned 2 -
Intangible assets - 83
Capital lease obligation 6 21
Pension expense 58 35
---- ----
Gross deferred tax assets 465 383
---- ----
Deferred tax liabilities:
Net unrealized gain on securities 152 114
Depreciation 221 215
Intangible assets 308 -
Net loan origination costs 21 17
Other 38 -
---- ----
Gross deferred tax liabilities 740 346
---- ----
Net deferred tax (liability)asset $ (275) $ 37
========= =========
15
<PAGE>
11. PENSION PLAN
The following summarizes benefit obligation and plan asset activity (in
thousands):
1998 1997
---- ----
Change in fair value of plan assets
Balance at beginning of period 1,802 1,509
Actual return on plan assets 352 312
Benefits paid (46) (19)
------ -------
Balance at end of year 2,108 1,802
------ -------
Change in benefit obligation
Balance at beginning of period 1,586 1,319
Service cost 112 95
Interest cost 113 99
Actuarial loss 111 92
Benefits paid (46) (19)
------ -------
Balance at end of year 1,876 1,586
------ -------
Funded status 232 216
Unamortized prior service cost 1 1
Unrecognized net actuarial gain (297) (208)
Unrecognized transition asset (105) (113)
------ -------
Accrued pension cost $ (169) $ (104)
======= ========
Plan assets are primarily comprised of debt and equity mutual funds at December
31, 1998 and 1997.
In preparing the above information, the following actuarially assumed rates were
used.
1998 1997
---- ----
Discount rate 6.75% 7.25%
Rate of increase in future compensation levels 5.00 5.00
Rate of return on plan assets 8.50 8.50
The following presents the components of the pension plan expense (in
thousands):
1998 1997
---- ----
Service cost $ 112 $ 95
Interest cost 113 99
Expected return on plan assets (151) (128)
Transition asset (8) (8)
Recognized net actuarial loss (1) -
--------- ---------
Net periodic pension cost $ 65 $ 58
========= =========
16
<PAGE>
12. BORROWED FUNDS
Short-term Borrowings and Available Lines of Credit
- ---------------------------------------------------
The Bank maintains a credit arrangement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), as a source of additional liquidity. This credit line has
an available limit of $10.0 million at December 31, 1998, 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 following table presents information related to short- term borrowings
during 1998 and 1997 (dollars in thousands):
1998 1997
---- ----
Outstanding balance at December 31, $ - $ 200
Average balance outstanding 83 117
Maximum month-end balance 1,850 1,250
Weighted average interest rate for the year 5.72% 5.71%
Weighted average interest rate at year-end N/A 6.75
Long-term borrowings
- --------------------
Included in borrowed funds is an advance from the FHLB totaling $2,000,000 at
December 31, 1998, maturing July 11, 2002, with a current interest rate of 5.60
percent. This borrowing may convert to a variable rate instrument should the
benchmark interest rate reach 6.50 percent. The Bank has 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, review procedures, and collateral requirements as
deemed necessary.
The off-balance sheet commitments were comprised of the following at December
31, (in thousands):
1998 1997
---- ----
Commitments to extend credit $ 9,078 $ 8,122
Standby letters of credit 1,171 1,225
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
17
<PAGE>
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 expiring
through 2003. Rental expense was $87,000 and $45,000 in 1998 and 1997,
respectively. Future minimum rental commitments under noncancellable leases are
(in thousands):
Future Minimum
Lease Payments
--------------
1999 $ 111
2000 111
2001 88
2002 66
2003 17
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, 1998 and 1997, the Bank had required reserves of
$1,084,000 and $899,000, respectively, 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 ten percent of the Bank's capital and surplus. There were
no loans between the Bank and the Company during 1998 and 1997.
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 $748,000 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 an
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,
1998. The Company meets all capital adequacy requirements to which it is
subject.
18
<PAGE>
As of December 31, 1998 and 1997, 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
December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $17,899 15.7% $ 9,142 8.0% $11,428 10.0%
Tier 1 capital to risk weighted assets 16,563 14.5 4,571 4.0 6,857 6.0
Tier 1 capital to average assets 16,563 8.8 7,496 4.0 9,369 5.0
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
</TABLE>
15. COMMON STOCK
Stock Dividend
- --------------
On December 18, 1997, the Company distributed 51,453 shares of common stock in
connection with a five percent 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.
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 of the Company's financial instruments at December 31,
are as follows (in thousands):
19
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
<S> <C> <C> <C> <C>
Cash and due from banks and federal
funds sold $ 18,689 $ 18,689 $ 4,975 $ 4,975
Time deposits with others 100 100 - -
Investment securities:
Available for sale 28,929 28,929 31,977 31,977
Held to maturity 3,392 3,419 6,057 6,053
Net loans 132,913 135,801 85,270 86,811
Accrued interest receivable 1,165 1,165 1,009 1,009
----------- ----------- ----------- -----------
$ 185,188 $ 188,103 $ 129,288 $ 130,825
=========== =========== =========== ==========
Financial liabilities
Deposits $ 169,870 $ 170,777 $ 117,655 $ 117,986
Borrowed funds 2,000 2,020 2,200 2,200
Accrued interest payable 420 420 322 322
----------- ----------- ----------- -----------
$ 172,290 $ 173,217 $ 120,177 $ 120,508
=========== =========== ============ ===========
</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, Time Deposits with Others, 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>
17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
-------- ---------
<S> <C> <C>
ASSETS
Cash on deposit in subsidiary bank $ 19 $ 6
Investment securities available for sale 1,344 -
Investment in bank subsidiary 19,665 13,490
Other assets 80 8
-------- ---------
TOTAL ASSETS $ 21,108 $ 13,504
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 7 $ 6
Stockholders' equity 21,101 13,498
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,108 $ 13,504
========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
Year Ended December 31,
1998 1997
-------- ------
<S> <C> <C>
INCOME
Dividends from subsidiary $ 1,443 $ 403
Other dividends 3 -
-------- ------
1,446 403
EXPENSES 26 18
-------- ------
Income before income taxes and equity in undistributed
earnings of subsidiary 1,420 385
Income tax benefit (8) (6)
-------- ------
Income before equity in undistributed earnings in subsidiary 1,428 391
Equity in undistributed earnings in subsidiary (105) 853
-------- ------
NET INCOME $ 1,323 $ 1,244
========== ==========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,323 $ 1,244
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary 105 (853)
Other, net (9) (76)
-------- --------
Net cash provided by operating activities 1,419 315
-------- --------
INVESTING ACTIVITIES
Purchase of available for sale securities (1,360) -
Net proceeds from acquisition 577 -
-------- --------
Net cash used for investing activities (783) -
-------- --------
FINANCING ACTIVITIES
Cash dividends paid (623) (475)
-------- --------
Net cash used for financing activities (623) (475)
-------- --------
Increase (decrease) in cash 13 (160)
CASH AT BEGINNING OF YEAR 6 166
-------- --------
CASH AT END OF YEAR $ 19 $ 6
======== ========
</TABLE>
22
<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
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, 1998 and 1997, 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, 1998 and 1997, 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, A.C.
S.R. Snodgrass, A.C.
Wexford, Pennsylvania
March 26, 1999
<TABLE>
<S> <C> <C> <C>
S.R. Snodgrass, A.C.
101 Bradford Road, Suite 100 Wexford, PA 15090-6909 Phone: 724-0934-0344 Facsimile: 724-934-03545
</TABLE>
<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 annual report 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.
[Assets Graph Omitted]
OVERVIEW
During 1998, Emclaire completed its first merger transaction by acquiring
Peoples Savings Financial Corporation ("Peoples") in a purchase transaction
valued at approximately $12.6 million. As a result of this transaction, the
three offices operated by Peoples' subsidiary Peoples Savings Bank ("Peoples
Savings") became offices of Farmers.
This acquisition increased total assets, net loans, and deposits by $42.1
million, $35.5 million and $35.0 million, respectively. The transaction was
completed through the issuance of 314,399 shares of common stock and a cash
payment of $5.7 million.
In March, the Company opened its eighth office located in Clarion Mall. The full
service office is located in a site previously occupied by another financial
institution. This new location allows 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.
In August, the Company occupied its newly constructed data processing center.
Along with this construction, the Company's data processing hardware and
software were upgraded, and check imaging was implemented.
Due largely to the increase in the loan portfolio, net interest income, on a tax
equivalent basis, increased 15%, resulting in an increase in net income of 27%.
Due to the effect of the issuance of 314,399 additional shares as part of the
Peoples merger, earnings per share for 1998 of $1.12, declined approximately 3%
from the $1.15 reported in 1997.
RESULTS OF OPERATIONS
Summary
Net income for 1998, totaled $1.3 million, an increase of $79,000 or 6% from
1997. This increase was largely due to the 15% increase in net interest income,
on a tax equivalent basis, which rose $893,000, to $6.8 million. The $25.9
million or 33% increase in loan volume was the principal factor for the increase
in net interest income.
Other operating income of $793,000 rose $197,000 or 33% from 1997. Excluding the
effect of a $50,000 nonrecurring net gain recorded on the sales of other real
estate owned, other operating income rose 25% due to the fees resulting from the
increase in the number of deposit accounts, combined with fee income associated
with ATM convenience charges and debit card transactions.
Total other operating expenses for the Company increased 22% to $5.4 million in
1998 as compared to $4.4 million in 1997. This increase in other operating costs
was due to a combination of factors including costs associated with the staffing
and operation of the additional branch operations, the transition to, and
ongoing operation of, the data processing center, and costs related to the
upgrading of the data processing software.
Earnings per share for 1998 of $1.12, represented a 3% decline from the $1.15
reported for 1997. This decline is attributed to the additional shares issued in
the merger.
24
<PAGE>
[Net Income Graph Omitted]
Net interest income
The Company's net interest income on a tax equivalent basis increased $893,000
or 15% to $6.8 million in 1998, due to an increase of $1.8 million or 19% in
interest income on a tax equivalent basis, which totaled $11.5 million for 1998
as compared to $9.6 million in 1997. This increase in interest income more than
offset the $942,000 or 25% increase in interest expense.
The increase in interest income for 1998, resulted primarily from an increase of
$1.99 million or 28% in interest income on loans, due to an increase in the
average outstanding balance of the portfolio, which rose $25.9 million to $104.5
million for the year. The 28% increase in loan volume (18% excluding the effect
of the loans acquired in the merger) served to offset the reduction in the
overall yield on the portfolio which declined 30 basis points to 8.59%. The
decline in yield is due to a general decline in long-term interest rates during
the second half of 1998. Specifically, the prime interest rate was lowered three
times, for a total reduction of 75 basis points, during the third and fourth
quarters. This general rate reduction, combined with increased competition for
loan customers impacted all segments of the portfolio. In addition, many of the
Company's variable rate commercial loans reprice quarterly, which resulted in a
further drop in the yield. 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 decreased $327,000, on a tax equivalent
basis, to $2.2 million. This decline was the result of the reduction in the
average volume of investment securities which fell $5.8 million or 16% for
taxable securities, and $114,000 or 3% for tax-exempt investments. The reduced
volume was partially offset by a slight increase in the yields on the investment
portfolio, which rose to 6.32% from 6.24% for taxable securities, and to 6.67%
from 6.23%, on a tax equivalent basis, for tax-exempt investments. The improved
yield on the taxable securities portfolio was due to the maturity of some lower
yielding issues during the year.
For 1998 the yield on earning assets, on a tax equivalent basis, decreased 3
basis points to 7.92%. This slight decline resulted from the effect of the
generally lower interest rate environment, previously discussed
Interest expense increased $942,000 or 25% to $4.7 million for 1998, from $3.7
million in 1997, due to the increase in the average volume of interest-bearing
liabilities which rose $18.9 million during 1998 ($7.0 million excluding the
impact of the merger), to $116.2 million. The average volume of time deposits
increased $11.8 million or 26% during 1998, resulting in an increase in the
related interest expense of $768,000 or 33%.
Despite the general decline in interest rates, the cost of interest bearing
liabilities increased to 4.02% for 1998 as compared to 3.83% for 1997. The most
significant contributing factor to the increase in the cost of funds was the
impact of the time deposits acquired in the merger. During 1998, continuing
competition for deposits and a flattening of the yield curve, as the spread
between short- and long-term interest rates narrowed, caused interest rates time
and core deposits to either increase slightly or not fall in proportion to the
reduction in long-term rates resulting in the increased cost of funds.
As a result of the slight decline in the yield on total earning assets, combined
with the increase in the cost of interest-bearing liabilities, the net yield on
earning assets decreased to 4.70% for 1998 as compared to 4.87% in 1997.
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>
Emclaire Financial Corp.
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
Average Yield/ Average Yield/
Volume Interest(2) Rate (2) Volume Interest(2) Rate (2)
------- ----------- -------- ------ ----------- --------
ASSETS
Interest-earning assets
Investment securities
<S> <C> <C> <C> <C> <C> <C>
Taxable $ 30,711 $ 1,940 6.32% $ 36,525 $ 2,279 6.24%
Exempt from federal income tax 4,381 292 6.67 4,495 280 6.23
Interest bearing deposits in
other banks 855 41 4.80 24 1 4.17
Loans (1) (3) 104,513 8,974 8.59 78,610 6,989 8.89
Federal funds sold 4,401 226 5.14 1,610 89 5.53
------- ------ ------- -----
Total interest-earning assets 144,861 11,473 7.92 121,264 9,638 7.95
------ -----
Noninterest-earning assets
Cash and due from banks 4,907 4,281
Allowance for loan losses (1,035) (795)
Other assets 7,332 5,501
------- -------
Total assets $156,065 $130,251
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 18,669 329 1.76% 16,481 295 1.79%
Money market accounts 18,785 607 3.23 18,134 579 3.19
Savings deposits 19,344 508 2.63 15,903 443 2.79
Time deposits 57,300 3,106 5.42 45,515 2,338 5.14
Obligation under capital lease 42 2 4.76 85 5 5.88
Borrowed funds 2,083 117 5.62 1,196 67 5.60
------- ------ ------- -----
Total interest-bearing
liabilities 116,223 4,669 4.02 97,314 3,727 3.83
------ -----
Noninterest-bearing liabilities
Demand deposits 22,731 19,417
Other liabilities 730 517
Capital 16,381 13,003
------- -------
Total liabilities and
stockholders' equity $156,065 $130,251
======== =======
Net interest income and net yield on
interest-earning assets $ 6,804 4.70% $ 5,911 4.87%
======== ===== ======== =====
</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 (dollars in thousands). 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.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 Change From 1997 1997 Change From 1996
--------------------------- ----------------------------
Total Change Due To Total Change Due To
Change Volume Rate Change Volume Rate
INTEREST INCOME ON:
<S> <C> <C> <C> <C> <C> <C>
Taxable investment securities $ (339) $ (368) $ 29 $ 400 $ 356 $ 44
Non-taxable investments 12 (7) 19 66 52 14
Interest bearing deposits in other
banks 40 40 - (1) (1) -
Loans 1,985 2,228 (243) 1,136 1,268 (132)
Federal funds sold 137 143 (6) (147) (151) 4
------- ------ ----- ----- ------ -----
Total interest income 1,835 2,036 (201) 1,454 1,524 (70)
------- ------ ----- ----- ------ -----
INTEREST EXPENSE ON:
NOW accounts 34 39 (5) 28 66 (38)
Money market accounts 28 21 7 35 38 (3)
Savings deposits 65 91 (26) 16 37 (21)
Time deposits 768 635 133 294 321 (27)
Obligation under capital lease (3) (2) (1) (2) (2) -
Borrowed funds 50 50 - 4 4 -
------- ------ ----- ----- ------ -----
Total interest expense 942 834 108 375 464 (89)
------- ------ ----- ----- ------ -----
NET INTEREST INCOME $ 893 $ 1,202 $ (309) $1,079 $ 1,060 $ 19
------- ------ ----- ----- ------ -----
</TABLE>
Provision for loan losses
The provision for loan losses of $200,000 for the year ended December 31, 1998
represented a 9% decrease from the $220,000 provided in 1997. In addition, the
allowance was increased by approximately $349,000, as a result of the Peoples
acquisition. 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 1998, is a reflection of the overall growth of
the loan portfolio during the year, combined with management's ongoing
assessment of the quality of the portfolio. The following table presents a
summary of loan losses by loan type and changes in the allowance for loan losses
(dollars in thousands):
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Total loans outstanding $ 134,249 $ 86,144
--------- --------
Average loans outstanding 104,513 78,610
--------- --------
Allowance for loan losses at beginning of year $ 874 $ 733
Provision charged to expense 200 220
Allowance related to loans acquired 349 -
Charge-offs:
Commercial and industrial - 1
Real estate 21 33
Consumer 92 74
--------- --------
Total 113 108
--------- --------
Recoveries:
Commercial and industrial 9 2
Real estate - 19
Consumer 17 8
--------- --------
Total 26 29
--------- --------
Net charge-offs 87 79
--------- --------
Allowance for loan losses at end of period $ 1,336 $ 874
========= ========
Allowance for loan losses as a percent of total loans 1.00% 1.01%
Net charge-offs as a percent of average loans .08 .10
</TABLE>
Other operating income
Other operating income which is comprised principally of fees and charges on
customer deposit accounts increased $197,000 or 33% to $793,000 in 1998 from
$596,000 in 1997. Included in the total for 1998, are nonrecurring gains of
approximately $50,000, resulting from the sale of foreclosed real estate.
Service charges on customer accounts increased $75,000 or 16%, due principally
to overdraft charges and returned check charges associated with the increase in
the number of deposit accounts. The operations acquired in the Peoples Savings
acquisition did not contribute significantly to the increase in fee income, due
to the low volume of checking accounts maintained at these offices.
Excluding the gains on other real estate, other income increased $72,000 or 60%
during the year due primarily to the effect of a full year of fees from the
MasterMoney(TM) debit card product and an ATM convenience charge for
non-customers using a Farmers ATM. These two user based fees increased a
combined $59,000 from 1997. Increases in safe deposit box rentals and
commissions on accident, life and health insurance on loans accounted for the
remaining increase.
Other operating expense
Other operating expense increased $972,000 or 22% to $5.4 million in 1998 as
compared to $4.4 million in 1997. This increase is largely attributed to the
overhead costs associated with the expansion and capital investments made by the
company during 1998. These projects included;
o Opening a de novo branch operation at Clarion Mall in March
o Completion and occupancy of the data processing center in August
o Integrating the branch operations from the Peoples Savings acquisition
o Upgrading computer equipment and core data processing software
o Implementing check imaging
Salaries and employee benefits for 1998 totaled $2.5 million, an increase of
$234,000 or 10% from $2.2 million reported in 1997. Of this total increase,
approximately $160,000 is related to the four additional branch offices opened
or acquired during the year. The remainder of the increase relates to normal
salary adjustments and to increases for such employee benefits as health
insurance
28
<PAGE>
and pension costs. For 1999, in addition to normal recurring salary adjustments,
it is expected certain employee benefit costs will again increase, such as
medical benefits which will rise approximately 12% or $35,000.
Occupancy and equipment expense increased $250,000 or 36% in 1998. Of this
increase, $109,000 is due to additional costs related to the operation of the
new branch offices. Additional depreciation of approximately $30,000 was taken
on computer network equipment, and costs associated with the operation of the
data center amounted to approximately $70,000, including depreciation on the new
data processing, and check imaging equipment. Increases in recurring costs such
as rent, service contracts, repairs and maintenance and utilities accounted for
the remainder of the increase.
Other expenses for 1998 totaled $1.9 million, a $488,000 or 34% increase from
the $1.5 million reported in 1997. Costs associated with the additional branch
offices primarily accounted for this increase. Printing and office supplies
increased $90,000 or 65% to $228,000 due to the addition of the four branch
operations, combined with costs associated with the transition to check imaging.
Telephone costs rose 77% to $186,000 as a result of the additional facilities,
combined with costs of transferring the Company's network data communications
from dedicated private lines to a frame relay network. This upgrade required a
period of time during which both the private lines and frame relay network were
both operating. In addition, the frame relay configuration is more costly than
private lines, but significantly improves the capacity and efficiency of data
transmissions. Costs associated with operating the Company's ATMs and debit card
product rose 42% to $136,000, due to the addition of an ATM at the Clarion Mall
office and costs resulting from increased customer usage of the ATM and debit
card products. Advertising and promotions costs increased approximately 29% to
$101,000, due to costs related to the implementation of check imaging, and the
acquisition of Peoples Savings. During the fourth quarter of 1998, a
non-recurring charge of $36,000 was recorded to write-off certain computer and
other data processing equipment, as a result of the upgrading of equipment and
the transition to check imaging. Amortization of intangible assets increased
approximately $58,000 due to the acquisition of the Peoples Savings Bank
offices. The remaining increase is a result of the growth experienced by the
Company, and affected such things as correspondent banking fees, insurance,
travel and lodging, and regulatory assessments.
In December 1998, the Company retained the services of a consultant to conduct
an organizational needs assessment. During the first quarter of 1999, the
Company began to outsource its human resource function, and committed to retain
an advisor to develop and coordinate a comprehensive training program. The costs
for these services will approximate $12,000 per month, and will continue for a
period ranging from 12 to 36 months.
In addition, based on the significant growth experienced over the past several
years, the board of directors will reevaluate and redraft the Company's
strategic plan beginning early in the second quarter of 1999.
Income Tax Expense
Income tax expense increased $44,000 or 8% during 1998 when compared to 1997,
due principally to the 7% increase in income before income taxes.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets at December 31, 1998, amounted to $194.1 million, an increase of
$60.2 million or 45%, from December 31, 1997. Of this increase, $42.1 million or
70% resulted from the Peoples acquisition. Excluding the effect of the
acquisition, asset growth totaled $18.1 million or 14%.
During 1998, the Company made significant capital investments, with the
completion of the data processing center, the upgrade of computer systems and
core data processing software, the implementation of check imaging and the
upgrade of its data transmission capabilities. The total capital outlay for
these projects amounted to approximately $1.7 million.
In addition, the acquisition of Peoples resulted in the recording of net fair
value and identifiable intangible assets of $917,000, and goodwill of $2.6
million. These assets will be amortized over periods ranging from two to
twenty-five years. The future expense resulting from the amortization of these
assets, does not represent a future cash outlay and will not adversely impact
liquidity.
For 1999, the Company plans to remodel its Brookville office facility, in order
to improve the layout of the facility and to bring the facade more in keeping
with the historic business district. While this project is in its preliminary
stages and a final estimate of the cost has not been determined, it is
anticipated the remodeling costs will total approximately $100,000, excluding
furnishings and equipment.
29
<PAGE>
[Investment Securities Graph Omitted]
Investment Securities
Total investment securities decreased $5.7 million during 1998, to $32.3
million, as the proceeds from investment security maturities were used to fund
loan demand.
Information detailing the book value of the investment portfolio by security
type and classification is presented in Note 4 to the consolidated financial
statements.
[Loans Graph Omitted]
Loans
Loans receivable at December 31, 1998 totaled $134.2 million, an increase of
$48.1 million or 56% from 1997. The acquisition of Peoples Savings accounted for
approximately $35.9 million of the total growth achieved.
The loan growth generated through originations during 1998, was largely from
increases in loans secured by residential or commercial real estate. These
segments of the portfolio increased $6.9 million or 15%, and $3.1 million or
20%, respectively. Commercial loans grew $2.1 million or 17%, while consumer
loans exhibited little change.
As a result of the acquisition of Peoples Savings, the mix of the loan portfolio
changed significantly. Residential mortgage loans now comprise 65% of the loan
portfolio, as compared to 53% in 1997. The other segments of the portfolio
declined proportionately, as a result of the increase in residential mortgage
loans.
The following table presents the composition of the loan portfolio and the
percentage of loans by type (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
% of loans % of loans
to to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial and industrial $ 14,223 10.6% $ 11,147 12.9%
Commercial and multi-family real estate 18,381 13.7 15,188 17.6
1 - 4 Family real estate 87,137 64.9 45,709 53.1
Consumer 14,508 10.8 14,100 16.4
------- ----- ------ -----
Total loans 134,249 100.0% 86,144 100.0%
===== =====
Less: allowance for loan losses 1,336 874
------- ------
Net loans $ 132,913 $ 85,270
======== ======
</TABLE>
30
<PAGE>
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, 1998, the Bank had $287,000 in loans greater than 90 days past
due and still accruing interest, and $1,022,000 in loans on nonaccrual status.
Of the total non-performing loans, $515,000 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. The borrower continues to
operate under Chapter 11 bankruptcy protection. During 1998, $170,000 in
payments were received on this account, resulting from the liquidation of
collateral. All the funds received, were applied to principal. As part of
management's ongoing assessment of its loan portfolio, $40,000 of the allowance
for loan losses at December 31, 1998, 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, along with nonaccrual loan
interest data (dollars in thousands):
December 31,
--------------------------
1998 1997
---- ----
Loans past due 90 days or more and
accruing $ 287 $ 171
Nonaccrual loans 1,022 820
------ -----
Non performing loans $ 1,309 $ 991
------ -----
Other real estate owned 80 -
------ -----
Total non performing assets $ 1,389 $ 991
====== =====
Non-performing loans to total loans 0.98% 1.15%
Allowance for loan losses to non-
performing loans 102.06 88.19
Non-performing loans to total assets .67 .74
Nonaccrual loan interest data:
Interest computed on original terms $ 76 $ 81
======= ======
Interest recognized in income $ - $ 15
======= ======
31
<PAGE>
At December 31, 1998, 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, and the current risk elements in the loan portfolio, management
believes the allowance for loan losses at December 31, 1998 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,
--------------------------------------------------------------------------
1998 1997
------------------------------- ------------------------------------
% of Loans % of Loans
to to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial and industrial $ 30 10.6% $ 49 12.9%
Commercial & multi-family real estate 153 13.7 205 17.6
1-4 family real estate 49 64.9 19 53.1
Consumer 291 10.8 101 16.4
Unallocated 813 - 500 -
--------- ----- -------- -------
$ 1,336 100.0% $ 874 100.0%
========= ===== ======== =======
</TABLE>
[Deposits Graph Omitted]
Deposits
Total deposits of $169.9 million at December 31, 1998, represented an increase
of $52.2 million or 44% from December 31, 1997. Excluding the impact of the
Peoples Savings acquisition, deposits increased approximately $17.2 million.
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 1998 and 1997. Information related to the maturity of time deposits of
$100,000 and over at December 31, 1998 is presented in Note 8 of the
accompanying consolidated financial statements.
Stockholders' Equity
Stockholders' equity increased $7.6 million or 56% during 1998 to $21.1 million.
This increase was principally the result of the issuance of 314,399 shares of
common stock in the Peoples Savings acquisition, which provided approximately
$6.8 million. The remaining $771,000, represents net retained earnings, and net
unrealized securities gains during the year.
[OBJECT 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
32
<PAGE>
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, 1998, pre-tax income would be impacted by such a change in interest
rates as follows:
Cumulative gap at 1 year (3.2%)
Impact on pre-tax earnings
+200 basis points
1.2
- -200 basis points
(5.0)
Liquidity
Liquidity represents the Company's ability to meet normal cash flow requirements
of its customers for the funding of loans and repayment of deposits. Liquidity
is generally derived from the repayments and maturities of loans and investment
securities, and the receipt of deposits. Management monitors liquidity daily,
and on a monthly basis incorporates liquidity management into its
asset/liability program.
Operating activities, as presented in the statement of cash flows in the
accompanying consolidated financial statements, provided $2.1 million in cash
during 1998, equaling that achieved during 1997. These funds were generated
principally from net income, and depreciation and amortization.
Investing activities consist primarily of loan originations and repayments, and
investment purchases and maturities. These activities used $4.7 million in funds
during 1998, principally for the net funding of loans which totaled $12.4
million for the year. This cash outlay exceeded funds received from investment
repayments and maturities, totaling $8.1 million. The acquisition of Peoples
Savings provided net cash of $2.2 million. For 1997, investing activities used
$10.0 million, resulting from $17.8 million in net loan originations, which were
funded by investment securities maturities and repayments of $9.1 million and
securities sales of $2.0
Financing activities consisted of the solicitation and repayment of customer
deposits, repayments of borrowed funds, and the payment of dividends. For 1998,
financing activities provided $16.3 million comprised of net deposit increases
of $17.2 million. For 1997, financing activities generated approximately $4.6
million, as the result of deposit growth of $2.9 million and an FHLB borrowing
of $2.0 million.
As presented in Note 8 of the consolidated financial statements, certificates of
deposit scheduled to mature in one year or less total $42.5 million at December
31, 1998.
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 is an available line of credit through the
FHLB. 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 equivalent yield and maturities at December 31, 1998
(dollars in thousands). Securities with no fixed maturity represent marketable
equity securities and stock of the Federal Reserve and Federal Home Loan Banks:
33
<PAGE>
<TABLE>
<CAPTION>
Available for Sale After 5
After 1 Year Years No
Within Within Within After Fixed
1 Year 5 Years 10 Years 10 Years Maturity Total
------ ------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 3,012 $ 3,983 $ - $ - $ - $ 6,995
U. S. Government Agency 3,003 2,003 - - - 5,006
Obligations of states and polictical
subdivisions - 2,797 1,455 - - 4,252
Corporate 1,809 8,162 - - - 9,971
Mortgage-backed securities - 9 - - - 9
Other - - - - 2,252 2,252
-------- ------- ------ ------- -------- ---------
Total $ 7,824 $ 16,954 $ 1,455 $ - $ 2,252 $ 28,485
======== ========= ======== ======= ======== =========
Yield 6.36% 6.65% 6.71% -% N/A 6.57%
Held to Maturity
U. S. Treasury $ - $ 1,003 $ - $ - $ - $ 1,003
Corporate 1,017 1,027 - - - 2,044
Mortgage-backed securities - - - 345 - 345
-------- ------- ------ ------- -------- ---------
Total $ 1,017 $ 2,030 $ - $ 345 $ - $ 3,392
======== ========= ======== ======= ======== =========
Yield 6.19% 6.18% -% 6.48% N/A 6.21%
</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, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
------ ------- ------------- -----
<S> <C> <C> <C> <C>
Commercial and industrial $ 3,472 $ 6,412 $ 4,339 $ 14,223
Commercial and multi-family real estate 1,194 2,131 15,056 18,381
------ ------ ------- ------
$ 4,666 $ 8,543 $ 19,395 $ 32,604
====== ====== ======= ======
Predetermined interest rates $ 896 $ 7,065 $ 11,864 $ 19,825
Floating interest rates 3,770 1,478 7,531 12,779
------ ------ ------ ------
$ 4,666 $ 8,543 $ 19,395 $ 32,604
====== ====== ====== ======
</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,
1998, loan and letter of credit commitments totaled $10.2 million.
34
<PAGE>
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.
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, 1998.
The Bank's regulatory capital position at December 31, 1998, 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
During 1998, the Company continued preparing for the century date change. The
upgrading of computer equipment and core software applications helped to ensure
that internal systems would be Y2K compliant. Testing of the new equipment and
software was successfully completed during the first quarter of 1999. With the
completion of the core software testing, the Company's testing program is
substantially complete.
Since commencing this project in 1997, the Company has completed the assessment,
remediation and testing of all critical components of its operations. In
addition, a contingency plan has been developed to be implemented in should an
unforeseen event occur that would limit the Company's ability to fully operate.
Such an event would be the failure of a public utility or key service provider.
Part of the contingency plan will involve the installation of a generator at the
data processing center.
During the first quarter of 1999, the Company's independent accountants were
contracted to review the results of the Company's testing program.
For the remainder of 1999, the Company will focus on maintaining Y2K compliance
by testing any equipment or software upgrades, continuing a customer
communication program, and refining its contingency plans.
As part of its customer awareness program, the Company sponsored a seminar for
customers and local businesses in May 1998. In addition, major commercial loan
customers were contacted in writing to assess their preparedness for the century
date change. Since the initial assessment in June 1998, loan officers and branch
managers have implemented a personal contact program with these customers to
determine any potential exposure that might exist if the customer fails to
adequately prepare for the Year 2000.
As part of the ongoing contingency planning, the Company has begun to assess the
potential liquidity risks associated with the century date change. This need for
additional liquidity will be addressed by monitoring customer deposit account
activity, and ensuring that alternative sources of funds are available.
Direct costs to date for achieving Y2K compliance have not been significant.
However, the time devoted by employees in this project has been significant.
Furthermore, as discussed earlier in this report, the Company made a significant
capital investment to upgrade its data processing capabilities.
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.
35
<PAGE>
COMMON STOCK INFORMATION
The Company's common stock traded over-the-counter and is quoted on the National
Association of Securities Dealers OTC Electronic Bulletin Board. Price
quotations reflect inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions. The following table summarizes the
high and low prices without retail mark-up, mark-down or commission, and may not
represent actual transactions. Dividend information for 1997 has been adjustment
for a 5% stock dividend paid in December 1997. Prices are based upon information
made available to the Company. Cash dividends are declared on a quarterly basis.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- --------------------------------------
Dividend Dividend
High Low Declared High Low Declared
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 22.00 $ 17.00 $ .12 $ 14.75 $ 13.25 $ .105
Second Quarter 24.00 21.00 .12 15.00 13.25 .105
Third Quarter 24.00 21.75 .12 16.67 14.28 .114
Fourth Quarter 23.00 21.00 .14 17.00 16.25 .114
</TABLE>
At December 31, 1998, the Company had 747 shareholders of record.
36
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C>
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
Hunter Leasing of the Boards 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
John J. Boczar, CPA John J. Boczar, CPA
Treasurer Vice President and Chief Financial Officer
Robert W. Foust
Vice President and Branch Administrator
OTHER OFFICERS
Edith M. Beckwith Mark L. Emerick Fred S. Port
Manager - Eau Claire Manager - Brookville Assistant Vice President
Manager - Clarion Mall
Sue Bricen Dwane A. Galbraith
Manager - Ridgway Assistant Manager- Brookville Joseph M. Sporer
Assistant Vice President
Scott B. Daum Allan I. Johnson Manager - Clarion
Assistant Vice President Manager - Knox
Operations Officer Robert A. Vernick
James W. LeVier Assistant Vice President
Janice F. Dittman Assistant Vice President Manager - Bon Aire
Manager - Data Processing Credit Administration
Cindy L. Elder Troy J. Moore
Assistant Vice President Acting Manager - East Brady
Manager - Emlenton
</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 Monday, May 10, 1999 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
INVESTOR INFORMATION
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
Ridgway DuBois Brookville
173 Main Street 17 W. Long Avenue 263 Main Street
Ridgway, PA 15853 DuBois, PA 15801 Brookville, PA 15825
(814) 773-3195 (814) 371-2166 (814) 849-8363
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 6,721
<INT-BEARING-DEPOSITS> 2,268
<FED-FUNDS-SOLD> 9,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,929
<INVESTMENTS-CARRYING> 3,392
<INVESTMENTS-MARKET> 3,419
<LOANS> 134,249
<ALLOWANCE> 1,336
<TOTAL-ASSETS> 194,132
<DEPOSITS> 169,870
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,142
<LONG-TERM> 2,019
0
0
<COMMON> 1,745
<OTHER-SE> 19,356
<TOTAL-LIABILITIES-AND-EQUITY> 194,132
<INTEREST-LOAN> 8,943
<INTEREST-INVEST> 2,133
<INTEREST-OTHER> 267
<INTEREST-TOTAL> 11,343
<INTEREST-DEPOSIT> 4,550
<INTEREST-EXPENSE> 4,669
<INTEREST-INCOME-NET> 6,674
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,354
<INCOME-PRETAX> 1,913
<INCOME-PRE-EXTRAORDINARY> 1,913
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,323
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.61
<LOANS-NON> 1,022
<LOANS-PAST> 287
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 874
<CHARGE-OFFS> 113
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 1,336
<ALLOWANCE-DOMESTIC> 523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 813
</TABLE>
