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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, 1999,
[ ] 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 ________________.
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. $14,512,000
As of March 29, 2000, there were issued and outstanding 1,353,540
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 29, 1999, was $16,515,444 ($15.06
per share average bid/ask price, based on 1,096,643 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, 1999. (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
General
Emclaire Financial Corp. ("Emclaire" or "Company") was incorporated in
Pennsylvania in 1989 to own and control all of the capital stock of The Farmers
National Bank of Emlenton ("Bank"). Emclaire is a registered bank holding
company pursuant to the Bank Holding Company Act of 1956 ("BHCA"), as amended.
Emclaire has no employees other than executive officers whom do not receive
compensation for serving in such capacity. Because Emclaire 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.
At December 31, 1999, Emclaire had $192.0 million in total assets, $20.8 million
in stockholders' equity, and $168.4 million in deposits. The Federal Insurance
Deposit Corporation to the full extent provided by law insures deposits.
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 operates a network of eleven offices located in Venango, Butler,
Clarion, Clearfield, Elk and Jefferson counties.
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 Emclaire's Annual Report to Stockholders ("Annual Report")
included as Exhibit 13 and incorporated herein by reference.
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured
by one-to-four family residences located in the Bank's primary lending area.
Typically such residences are single family owner occupied units. The Bank is an
approved, qualified lender for the Federal Home Loan Mortgage Corporation
("FHLMC"). As a result, the Bank may sell loans to and service loans for the
FHLMC. While the Bank has made no such sales to date, it anticipates the ability
to sell loans to the FHLMC will allow it to minimize the interest rate risk
associated with longer term fixed rate mortgages.
Home Equity Loans. The Bank originates home equity loans secured by
single-family residences. These loans may be either a single advance fixed rate
loan with a term of up to 15 years, or a variable rate revolving line of credit.
These loans are made only on owner-occupied single-family residences.
Commercial and Commercial Real Estate Loans. Commercial lending constitutes a
significant portion of the Bank's lending activities comprising a combined total
of 25.1% of the total loan portfolio at December 31, 1999. Commercial real
estate loans generally consist of loans granted for commercial purposes secured
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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, that 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 that they can extend to one borrower. Under current law, loans to one
borrower are limited to an amount equal to 15% of unimpaired capital and surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and surplus if the loan is secured by readily marketable collateral. At
December 31, 1999, the Bank's loans-to-one borrower limit based upon 15% of
unimpaired capital was $2.6 million. At December 31, 1999, the Bank's largest
aggregation of loans to one borrower was approximately $2.5 million of loans
secured by equipment and commercial real estate. At December 31, 1999, 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. However, during 1999,
approximately $2.5 million was invested in longer term callable municipal
securities, as part of strategy to moderate federal income taxes.
Investment decisions are made within policy guidelines established by the Board
of Directors. This policy is aimed at maintaining a diversified investment
portfolio, which complements the overall asset/liability and liquidity
objectives of the Bank, while limiting the related credit risk to an acceptable
level. For a description of the Company's investment portfolio see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report incorporated herein by reference.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
investing activities. Secondary sources of funds are derived from loan
repayments and investment maturities. Loan repayments can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates and general market conditions. The Bank also has access to
funds through credit facilities available from the Federal Home Loan Bank
("FHLB"). 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.
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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
Emclaire has one wholly-owned subsidiary, the Bank, a national association. As
of December 31, 1999, the Bank had no subsidiaries.
Personnel
At December 31, 1999, the Bank had 102 full time equivalent employees. A
collective bargaining unit represents none of its employees. 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.
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 that 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
Emclaire, 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
Emclaire and its subsidiaries.
The BHCA also generally limits the activities of a bank holding company to that
of banking, managing
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or controlling banks, or any other activity which is determined to be closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. Emclaire does not currently engage in any nonbanking
activities
Bank holding companies and their subsidiary banks are subject to the provisions
of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms
and the provisions of the CRA, the Bank's record in meeting the credit needs of
the community served by the Bank, including low- and moderate-income
neighborhoods, is generally annually assessed by the OCC. When a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. At March 22, 1999, 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 Emclaire. 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, 1999. 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.
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Insurance Assessments - Deposits of the Bank are insured by the BIF of the FDIC
and are subject to FDIC insurance assessments. The amount of FDIC assessments
paid by the individual insured depository institution is based on their relative
risk as measured by regulatory capital ratios and certain other factors. During
1995, the FDIC significantly reduced premium rates assessed on deposits insured
by the BIF. Under the current regulations, the Bank is assessed a premium on
BIF-insured deposits.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 (the "Act"), the Bank paid, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points toward the retirement of the Financing
Corporation bonds ("FICO Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, 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, 1999, 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 Emclaire 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, 1999, 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
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (The "GLB Act") which, effective March 11, 2000, permitted qualifying bank
holding companies to become financial holding companies and engage in other
activities that are financial nature or incidental to financial activity. The
GLB Act defines "financial in nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; merchant bank activities; and activities that
the Federal Reserve Board ("FRB") has determined to be closely related to
banking. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are and continue to be well-capitalized and well-managed and have at least a
satisfactory rating under the Community Reinvestment Act.
The GLB Act also authorizes national banks to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company and any activity that is determined to be financial in nature or
incidental to a financial activity, except insurance underwriting, real estate
development, real estate investment (except as otherwise permitted by law),
insurance company portfolio investments and merchant banking activities. The
authority of a national bank to invest in a financial subsidiary is subject to a
number of conditions, including among other things, requirements that the bank
must be well-managed and well-capitalized (after deducting from capital the
bank's outstanding investments in financial subsidiaries). In addition, the GLB
Act enacts a number of consumer protections, including provisions intended to
protect privacy of bank customers' financial information and provisions
requiring disclosure of ATM fees imposed by banks on customers of other banks.
Item 2. Description of Property
(a) Properties.
Emclaire 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. Emclaire pays no rent or other form of consideration for
the use of this facility. The Bank also owns a facility that houses its data
processing operations. 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 $5.7 million with a net book
value of $3.4 million at December 31, 1999.
<TABLE>
<CAPTION>
Main Office Eau Claire Office Clarion Office Data Center
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<S> <C> <C> <C>
612 Main Street 207 South Washington Street Sixth and Wood Streets 708 Main Street
Emlenton, Pennsylvania Eau Claire, Pennsylvania Clarion, Pennsylvania Emlenton, Pennsylvania
Venango County Butler County Clarion County Venango, County
</TABLE>
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<TABLE>
<CAPTION>
East Brady Office Bon Aire Office Knox 338 Office Knox Main Street Office
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<S> <C> <C> <C>
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
<CAPTION>
Clarion Mall Office Ridgway Office DuBois Office Brookville Office
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<S> <C> <C> <C>
Clarion Mall, Room 400 173 Main Street 17 W. Long Avenue 263 Main Street
Clarion, Pennsylvania Ridgway, Pennsylvania DuBois, Pennsylvania Brookville, Pennsylvania
Clarion County Elk County Clearfield County Jefferson County
</TABLE>
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 gains.
(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
Neither the Bank nor Emclaire is involved in any material legal proceedings. The
Bank, from time to time, is party to litigation which arises in the ordinary
course of business, such as claims to enforce liens, claims involving the
origination and servicing of loans, and other issues related to the business of
the Bank. In the opinion of management the resolution of any such issues would
not have a material adverse impact on the financial position, results of
operation, or liquidity of the Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to stockholders for a vote during the quarter ended
December 31, 1999.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Common Stock Information"
in Emclaire's Annual Report for the fiscal year ended December 31, 1999, is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The required information is contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report and is incorporated
herein by reference.
Item 7. Financial Statements
Emclaire'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
with Section 16(b) of the Exchange Act
The information contained under the sections captioned "Principal Beneficial
Owners of the Corporation's Common Stock" and "Information as to Nominees,
Directors and Executive Officers" in the Company's definitive proxy statement
for the Company's Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Information as to
Nominees, Directors and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
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(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the
section captioned "Information as to Nominees, Directors and Executive Officers"
in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits are either attached as part of this Report or incorporated
herein by reference.
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 two (2) 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, 1999.
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.
<TABLE>
<S> <C>
Dated: April ____, 2000 By: /s/ David L. Cox
--------------------------------------
David L. Cox
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
</TABLE>
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ David L. Cox By: /s/ John J. Boczar
---------------------------------- -------------------------------
David L. Cox John J. Boczar
President, Chief Executive Officer, and Director Secretary/Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: April 11, 2000 Date: April 11, 2000
By: /s/ Ronald L. Ashbaugh By: /s/ Brian C. McCarrier
---------------------------------- -------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: April 11, 2000 Date: April 11, 2000
By: By: /s/ George W. Freeman
---------------------------------- -------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: April , 2000 Date: April 11, 2000
By: By:
---------------------------------- -------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: April , 2000 Date:
By: /s/ J. Michael King By: /s/ John B. Mason
---------------------------------- -------------------------------
J. Michael King John B. Mason
Director Director
Date: April 11, 2000 Date: April 11, 2000
</TABLE>
By:
----------------------------------
Elizabeth C. Smith
Director
Date:
11
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended December 31, 1999
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[LOGO OMITTED] Emclaire Financial Corp.
1999 ANNUAL REPORT TABLE OF CONTENTS Page
President's Letter 1
Selected Financial Data 2
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 7
Report of Independent Auditors 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Common Stock Information 34
Directors and Officers 35
ANNUAL MEETING
The Annual Meeting of Shareholders of Emclaire Financial Corp. will be held at
the Clarion Holiday Inn, I-80 and Rt. 66, Clarion, PA on Tuesday May 16, 2000,
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, Secretary/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:
<TABLE>
<S> <C> <C> <C>
E. E. Powell & Co., Inc. F. J. Morrissey & Co., Inc. Parker/Hunter, Inc.
1100 Gulf Tower 1700 Market Street - Suite 1420 600 Grant Street - Suite 3100
Pittsburgh, PA 15219 Philadelphia, PA 19103 Pittsburgh, PA 15219
(800) 289-7865 (215) 563-8500 (412) 562-8000
Farmers National Bank Branch Locations
Emlenton Eau Claire Clarion - 2 Locations Knox - 2 Locations
612 Main Street 207 S. Washington Street Sixth & Wood Streets Rt. 338 South
Emlenton, PA 16373 Eau Claire, PA 16030 Clarion, PA 16214 Knox, PA 16232
(724) 867-2311 (724) 791-2591 (814) 226-7523 (814) 797-2200
and and
East Brady Butler
323 Broad Street Bon Aire Plaza Clarion Mall Main & State Streets
East Brady, PA 16028 1101 North Main Street I-80 and Rt. 68 Knox, PA 16232
(724) 526-5793 Butler, PA 16003 Clarion, PA 16214 (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>
<PAGE>
[GRAPHIC OMITTED]Emclaire Financial Corp.
Dear Stockholders and Friends:
The 1900's came to a close on December 31, 1999, and our bank survived the
dreaded century date roll over. We found that we were prepared and no major
problems accompanied the century date change. As we begin the new millennium, we
are prepared to celebrate 100 years of community service by Farmers National
Bank.
The year 1999 showed a healthy growth in income for our company. Net income rose
$431,000 or 33% from the prior year to $1,754,000, as earnings per share
increased 13% to $1.26. The improvement in earnings is attributed to a
combination of the increase in net interest income, which rose 20% or $1.3
million, combined with more moderate growth in other operating expenses. Other
operating expenses, excluding the effect of non-recurring charges incurred in
1998, rose $902,000 or 17% in 1999, due to staff added during the year and the
full-year operation of the offices acquired in 1998. Total assets decreased
slightly to $192.0 million, reflecting a similar decrease in total deposits as
result of restructuring time deposits acquired in the purchase of Peoples
Savings Bank. During the year total loans rose $5.2 million or 4% to $139.5
million
During 1999 we worked hard at integrating the Peoples Savings Bank operations
into the Farmers system. We are committed to continue this process with the
remodeling of the Brookville office in 2000, and moving the DuBois office to a
new facility in the second quarter of the new year. New management talent in our
Brookville, DuBois, Clarion and Butler markets is preparing our Bank for success
in the new millennium. We are also planning new products and services to be
implemented during the Year 2000 and beyond that will focus on improving our
relationships with new and existing customers. Going forward, we will be
focusing our efforts on customer service which will maximize our returns from
the markets we serve.
Management and strategic planning were major issues addressed in 1999. We
revisited our strategic plan with input from the Board of Directors, senior
management and employees. This resulted in a restructure that added new
management in operations, credit administration, network administration and
marketing areas, along with duty realignment in business development, and branch
administration. We focused our efforts on goal setting and the team concept. We
have developed a team focused on moving the bank forward to enhance employee
development, which will result in increased customer service. This will lead to
improved financial performance, resulting in increased shareholder value. We
also initiated a stock buy-back program that is expected to result in the
repurchase of approximately five-percent of our outstanding shares. This
buy-back program should aid in improving some of our financial performance
ratios.
I would like to personally invite all of our friends to our annual meeting on
May 16, 2000 at the Holiday Inn Clarion. This will mark our 100th anniversary of
serving communities in northwest Pennsylvania. We are moving forward to provide
excellent customer service and products, delivered by motivated and trained
employees, which will increase market share and improve shareholder return. We
have been successful over the past 100 years and have prepared for continued
success in the future.
Sincerely,
/s/ David L. Cox
- -----------------------------------------------
David L. Cox
Chairman, President and Chief Executive Officer
<PAGE>
Selected Financial Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest income $ 13,652 $ 11,343 $ 9,523 $ 8,098 $ 7,437
Interest expense 5,647 4,669 3,727 3,352 2,986
--------- --------- --------- --------- ---------
Net interest income 8,005 6,674 5,796 4,746 4,451
Provision for loan losses 162 200 220 120 143
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 7,843 6,474 5,576 4,626 4,308
Other income 860 793 596 427 389
Other expense 6,167 5,354 4,382 3,636 3,005
--------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect adjustment 2,536 1,913 1,790 1,417 1,692
Applicable income tax expense 782 590 546 436 520
--------- --------- --------- --------- ---------
NET INCOME $ 1,754 $ 1,323 $ 1,244 $ 981 $ 1,172
========= ========= ========= ========= =========
PER SHARE DATA (1)
Earnings per share $ 1.26 $ 1.12 $ 1.15 $ 1.15 $ 1.40
Dividends paid $ .57 $ .50 $ .44 $ .41 $ .43
Book value per share at period end $ 15.11 $ 15.12 $ 12.48 $ 11.68 $ 10.76
Average number of shares outstanding 1,394,473 1,186,540 1,081,453 852,403 839,160
STATEMENT OF CONDITION STATISTICS
(At end of period)
Assets $ 192,004 $ 194,132 $ 133,956 $ 128,002 $ 98,599
Deposits 168,425 169,870 117,655 114,725 88,944
Loans 139,462 134,249 86,144 68,428 64,322
Allowance for loan losses 1,373 1,336 874 733 687
Federal funds sold - 9,700 - 3,500 2,500
Investment securities 35,777 32,321 38,034 46,483 26,361
Stockholders' equity 20,804 21,101 13,498 12,631 9,032
SIGNIFICANT RATIOS
Return on average equity 8.27% 8.08% 9.57% 10.33% 13.56%
Return on average assets .90 .85 .96 .89 1.20
Net yield on earning assets 4.56 4.71 4.88 4.68 4.97
Net loans as a percent of deposits 81.99 78.24 72.47 59.01 71.55
Equity to assets at period end 10.84 10.87 10.08 9.87 9.16
Average earning assets to total assets 92.71 92.56 93.02 93.63 94.11
Average interest-bearing liabilities to total assets 74.86 74.47 74.71 77.02 77.26
Dividends as a percent of net income 45.24 44.64 38.26 35.65 30.71
Allowance for loan losses to total loans .98 1.00 1.01 1.07 1.07
Full time equivalent employees 102 88 75 74 52
Banking offices 11 11 7 7 4
</TABLE>
(1) - Adjusted for a 5% stock dividend in 1997, and a 4-for-1 stock split in
1996.
Emclaire Financial Corp. 2 1999 Annual Report
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,595 $ 8,989
Federal funds sold - 9,700
Time deposits with other financial institutions - 100
Investment securities (Note 4):
Available for sale 33,499 28,929
Held to maturity (estimated market value
of $2,269 and $3,419) 2,278 3,392
Loans (Note 5) 139,462 134,249
Less allowance for loan losses (Note 6) 1,373 1,336
--------- ---------
Net loans 138,089 132,913
Premises and equipment (Note 7) 3,369 3,625
Accrued interest and other assets 6,174 6,484
--------- ---------
TOTAL ASSETS $ 192,004 $ 194,132
========= =========
LIABILITIES
Deposits
Noninterest bearing demand $ 27,871 $ 24,746
Interest bearing demand 21,628 22,026
Savings 23,021 22,527
Money market 22,254 21,381
Time (Note 8) 73,651 79,190
--------- ---------
Total deposits 168,425 169,870
Borrowed funds (Note 12) 2,000 2,000
Accrued interest and other liabilities 775 1,161
--------- ---------
TOTAL LIABILITIES 171,200 173,031
--------- ---------
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 shares issued 1,745 1,745
Additional paid-in capital 10,871 10,871
Retained earnings 9,151 8,192
Accumulated other comprehensive (loss) income (663) 293
Treasury stock at cost (19,242 shares) (300) -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 20,804 21,101
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 192,004 $ 194,132
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
Emclaire Financial Corp. 3 1999 Annual Report
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
--------- ---------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 11,067 $ 8,943
Interest bearing deposits in other banks 102 41
Federal funds sold 404 226
Investment securities:
Taxable 1,809 1,940
Exempt from federal income tax 270 193
--------- ---------
Total interest income 13,652 11,343
--------- ---------
INTEREST EXPENSE
Deposits 5,533 4,550
Borrowed funds 114 119
--------- ---------
Total interest expense 5,647 4,669
--------- ---------
NET INTEREST INCOME 8,005 6,674
Provision for loan losses 162 200
--------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,843 6,474
--------- ---------
OTHER OPERATING INCOME
Service fees on deposit accounts 621 551
Other 239 242
--------- ---------
Total other operating income 860 793
--------- ---------
OTHER OPERATING EXPENSE
Salaries and employee benefits 3,041 2,474
Occupancy, furniture and equipment 948 938
Other (Note 9) 2,178 1,942
--------- ---------
Total other operating expense 6,167 5,354
--------- ---------
Income before income taxes 2,536 1,913
Income taxes (Note 10) 782 590
--------- ---------
NET INCOME $ 1,754 $ 1,323
========= =========
EARNINGS PER SHARE $ 1.26 $ 1.12
AVERAGE SHARES OUTSTANDING 1,394,473 1,186,540
</TABLE>
See accompanying notes to the consolidated financial statements.
Emclaire Financial Corp. 4 1999 Annual Report
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
---------- ------------- ---------- --------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
net of tax of $37 71 71
--------
Total comprehensive income 1,394
Dividends declared
($.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
Comprehensive income:
Net income 1,754 1,754
Other comprehensive income, net
unrealized losses on securities
net of tax benefit of $493 (956) (956)
--------
Total comprehensive income 798
Dividends declared
($.57 per share) (795) (795)
Treasury stock acquired (Note 15) (300) (300)
-------- -------- -------- -------- ------- --------
Balance December 31, 1999 $ 1,745 $ 10,871 $ 9,151 $ (663) $ (300) $ 20,804
======== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
Emclaire Financial Corp. 5 1999 Annual Report
<PAGE>
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,754 $ 1,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 934 788
Net amortization of investment security
discounts and premiums 121 147
Provision for loan losses 162 200
Deferred income taxes (3) (47)
(Increase) decrease in accrued interest receivable (32) 21
Decrease in accrued interest payable (44) (113)
Other, net (91) (170)
----------- -----------
Net cash provided by operating activities 2,801 2,149
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 7,805 5,500
Held to maturity 1,080 2,623
Purchases of investment securities:
Available for sale (13,911) (1,903)
Net loan originations (5,393) (12,395)
Purchases of premises and equipment (149) (1,118)
Proceeds from sale of foreclosed assets 126 343
Net proceeds from acquisition (Note 3) - 2,232
Other 106 -
----------- -----------
Net cash used for investing activities (10,336) (4,718)
----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,445) 17,150
Decrease in short-term borrowings - (200)
Payments for obligation under capital lease (19) (44)
Acquisition of treasury stock (300) -
Cash dividends paid, including fractional shares (795) (623)
----------- -----------
Net cash (used for) provided by financing activities (2,559) 16,283
----------- -----------
Increase (decrease) in cash and cash equivalents (10,094) 13,714
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,689 4,975
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,595 $ 18,689
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
Emclaire Financial Corp. 6 1999 Annual Report
<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 Board of Governors of the Federal Reserve
System supervises the Company, 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 all amounts due according to the contractual terms of the
loan. Loan impairment is measured based on the present value of expected cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
Emclaire Financial Corp. 7 1999 Annual Report
<PAGE>
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 $3,083,000 and $3,218,000, at December 31, 1999 and
1998, respectively, is amortized using the straight-line method over a period
not to exceed 25 years. Core deposit intangible premiums totaling $851,000 and
$1,063,000 at December 31, 1999 and 1998, 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
The Company is required to present comprehensive income in a full set of
general-purpose financial statements for all periods presented. Other
comprehensive income is comprised exclusively of unrealized holding gains
(losses) on the available-for-sale securities portfolio. The Company has elected
to report the effects of other comprehensive income as part of the 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.
Cash Flow Information
The Company has defined cash equivalents as those amounts included in due from
banks and federal funds sold.
Cash payments for interest in 1999 and 1998 were $5,691,000 and $4,571,000,
respectively. Cash payments for income taxes in 1999 and 1998 were $787,000 and
$608,000, 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,
respectively in 1998.
Emclaire Financial Corp. 8 1999 Annual Report
<PAGE>
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities
Financial Accounting Standards Board Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by statement No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" requires 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 derivative and the hedged asset or liability to be recognized in
earnings in the same period. For derivative instruments not accounted for as
hedges, changes in fair value will be recognized in earnings.
This statement becomes effective for interim and annual reporting beginning
January 1, 2001. 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 acquired 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 $5.7 million, and was valued at approximately $12.6 million.
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.
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Available for Sale 1999
----------------------------------------------------------------
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 $ 14,936 $ 13 $ (258) $ 14,691
Obligations of states and political
subdivisions 7,225 4 (286) 6,943
Corporate notes 10,032 - (45) 9,987
Mortgage-backed securities 4 - - 4
-------- ----- -------- --------
Total debt securities 32,197 17 (589) 31,625
Marketable equity securities including
equity investments in Federal Reserve
and Federal Home Loan Banks 2,307 - (433) 1,874
-------- ----- -------- --------
Total $ 34,504 $ 17 $ (1,022) $ 33,499
======== ===== ======== ========
</TABLE>
Emclaire Financial Corp. 9 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Held to Maturity 1999
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 1,001 $ 1 $ - $ 1,002
Corporate notes 1,014 - (3) 1,011
Mortgage-backed securities 263 - (7) 256
------- --- ----- -------
Total $ 2,278 $ 1 $ (10) $ 2,269
======= === ===== =======
</TABLE>
<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
========= ===== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity 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 $ 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>
No sales of securities were transacted during 1999 or 1998.
Investment securities with a carrying value of approximately $6,926,000 and
$5,779,000 at December 31, 1999 and 1998, 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.
Emclaire Financial Corp. 10 1999 Annual Report
<PAGE>
The amortized cost and estimated market value of debt securities at December 31,
1999, 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.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,224 $ 8,224 $ 2,015 $ 2,013
Due after one year through five years 20,348 20,055 - -
Due after five years through ten years 653 640 - -
After ten years 2,972 2,706 263 256
-------- -------- ------- -------
Total $ 32,197 $ 31,625 $ 2,278 $ 2,269
======== ======== ======= =======
</TABLE>
5. LOANS
Major classifications of loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial and industrial $ 14,660 $ 14,223
Real estate mortgages
Residential 90,232 87,137
Commercial and other 20,360 18,381
Consumer 14,210 14,508
--------- ---------
139,462 134,249
Less allowance for loan losses 1,373 1,336
--------- ---------
Total $ 138,089 $ 132,913
========= =========
</TABLE>
In the normal course of business, loans are extended to directors, executive
officers, and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness, 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 $210,000 and $167,000 at December 31, 1999
and 1998, 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, 1999, is as follows (in thousands):
1998 New Loans Repayments 1999
---- ---------- ---------- ----
$1,517 164 326 $1,355
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, 1999 and 1998, loans outstanding to individuals and
businesses are dependent upon the local economic conditions within the immediate
trade area.
Emclaire Financial Corp. 11 1999 Annual Report
<PAGE>
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows (in
thousands):
1999 1998
---- ----
Balance, beginning of year $ 1,336 $ 874
Allowance related to loans acquired - 349
Provision 162 200
Recoveries 30 26
Charge-offs (155) (113)
------- -------
Balance, end of year $ 1,373 $ 1,336
======= =======
At December 31, 1999 and 1998, the recorded investment in loans which are
considered to be impaired was $515,000 for each year, all of which was placed in
nonaccrual status. In addition, $40,000 of the related allowance for loan losses
has been allocated for these impaired loans at December 31, 1999 and 1998,
respectively.
The average recorded investment in impaired loans during the years ended
December 31, 1999 and 1998, was approximately $515,000 and $575,000,
respectively. Interest income totaling $45,000 was recognized on impaired loans
in 1999, using the cash basis method of income recognition. No interest income
was recognized on impaired loans during 1998.
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows (in
thousands):
1999 1998
---- ----
Land and improvements $ 306 $ 304
Buildings 2,762 2,752
Construction in process 16 -
Leasehold improvements 184 183
Furniture and fixtures 2,459 2,343
------- -------
5,727 5,582
Less accumulated depreciation 2,358 1,957
------- -------
Total $ 3,369 $ 3,625
======= =======
Depreciation and amortization charged to operations was $401,000 in 1999 and
$365,000 in 1998.
Emclaire Financial Corp. 12 1999 Annual Report
<PAGE>
8. TIME DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $7,956,000 and $10,397,000 at December 31, 1999
and 1998, respectively. The following schedule presents the contractual
maturities for time deposits in excess of $100,000 at December 31, 1999 (in
thousands):
Within three months $ 2,844
After three months through six months 1,957
After six months through one year 934
After one year 2,221
-------
Total $ 7,956
=======
9. OTHER EXPENSES
The following is an analysis of other expenses (in thousands):
1999 1998
---- ----
Software amortization $ 165 $ 122
Postage 133 135
ATM and debit card processing 220 136
Telephone 223 186
Printing and supplies 142 228
Amortization of intangible assets 368 301
Other 927 834
------- -------
Total $ 2,178 $ 1,942
======= =======
10. INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
Currently payable $ 785 $ 637
Deferred (3) (47)
----- ------
Total $ 782 $ 590
===== =====
Emclaire Financial Corp. 13 1999 Annual Report
<PAGE>
The reconciliation between the federal statutory rate and the Company's
effective income tax rate is as follows (dollars in thousands):
<TABLE>
<CAPTION>
% of Pre-Tax % of Pre-Tax
Amount Income Amount Income
----- ------------ ----- ------------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 862 34.0% $ 650 34.0%
Effect of tax exempt income (135) (5.3) (86) (4.5)
Goodwill 36 1.4 12 0.6
Other 19 0.7 14 0.7
----- ---- ----- ----
Total $ 782 30.8% $ 590 30.8%
===== ==== ===== ====
</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):
1999 1998
----- -----
Deferred tax assets:
Net unrealized loss on securities $ 341 $ -
Provision for loan losses 400 399
Other real estate owned - 2
Capital lease obligation - 6
Accrued pension cost 58 58
----- -----
Gross deferred tax assets 799 465
----- -----
Deferred tax liabilities:
Net unrealized gain on securities - 152
Depreciation 248 221
Intangible assets 48 308
Net loan origination costs 30 21
Other 252 38
----- -----
Gross deferred tax liabilities 578 740
----- -----
Net deferred tax asset (liability) $ 221 $(275)
===== =====
Emclaire Financial Corp. 14 1999 Annual Report
<PAGE>
The following summarizes benefit obligation and plan asset activity (in
thousands):
11. PENSION PLAN
1999 1998
---- ----
Change in fair value of plan assets
Balance at beginning of period $ 2,108 $ 1,802
Actual return on plan assets 171 352
Benefits paid (45) (46)
------- -------
Balance at end of year 2,234 2,108
------- -------
Change in benefit obligation
Balance at beginning of period 1,876 1,586
Service cost 146 112
Interest cost 125 113
Actuarial (gain) loss (153) 111
Benefits paid (44) (46)
------- -------
Balance at end of year 1,950 1,876
------- -------
Funded status 284 232
Unamortized prior service cost 1 1
Unrecognized net actuarial gain (439) (297)
Unrecognized transition asset (97) (105)
------- -------
Accrued pension cost $ (251) $ (169)
======= =======
Plan assets are primarily comprised of debt and equity mutual funds at December
31, 1999 and 1998.
In preparing the above information, the following actuarially assumed rates were
used.
1999 1998
---- ----
Discount rate 7.25% 6.75%
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):
1999 1998
---- ----
Service cost $ 146 $ 112
Interest cost 125 113
Expected return on plan assets (177) (151)
Transition asset (8) (8)
Recognized net actuarial loss (4) (1)
----- -----
Net periodic pension cost $ 82 $ 65
===== =====
Emclaire Financial Corp. 15 1999 Annual Report
<PAGE>
12. BORROWED FUNDS
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, 1999, 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.
Long-term borrowings
Included in borrowed funds is an advance from the FHLB totaling $2,000,000 at
December 31, 1999 and 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
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk or liquidity risk in excess of the amount
recognized in the consolidated balance sheet.
The Company's exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments
The off-balance sheet commitments were comprised of the following at December 31
(in thousands):
1999 1998
---- ----
Commitments to extend credit $ 11,949 $ 9,078
Standby letters of credit 869 1,171
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 generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being fully drawn on, the total contractual amounts do not
necessarily represent future funding requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company on extension of credit is based on
management's credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending normal loan commitments to customers. The Company generally holds
collateral supporting standby letters of credit.
Operating Leases
Certain office facilities are leased under various operating leases expiring
through 2003. Rental expense was $114,000 and $87,000 in 1999 and 1998,
respectively. Future minimum rental commitments under noncancellable leases are
(in thousands):
Emclaire Financial Corp. 16 1999 Annual Report
<PAGE>
Future Minimum
Lease Payments
--------------
2000 $ 111
2001 88
2002 66
2003 17
-----
Total $ 282
=====
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, 1999 and 1998, the Bank had required reserves of
$1,515,000 and $1,084,000, 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 1999 and 1998.
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 2000, without approval of
the comptroller, will be limited to $610,000 plus net profits retained up to the
date of the dividend declaration.
Regulatory Capital Requirements
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain minimum dollar amounts
and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1
capital to average assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized". Should any
institution fail to meet the requirements to be considered "adequately
capitalized", it would become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the Company and the Bank have 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.
The following table presents the Company's capital ratios and minimum
requirements at December 31 (dollars in thousands). The Bank's capital ratios
are substantially the same as the Company's.
Emclaire Financial Corp. 17 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Regulatory Capitalization Requirement
-------------------------------------
Actual Adequate Well
------ -------- ----
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total capital to risk-weighted assets $18,620 15.9% $9,367 8.0% $11,709 10.0%
Tier 1 capital to risk-weighted assets 17,247 14.7 4,684 4.0 7,026 6.0
Tier 1 capital to average assets 17,247 9.1 7,618 4.0 9,522 5.0
December 31, 1998
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
</TABLE>
15. COMMON STOCK
On October 20, 1999, the Company approved a stock repurchase plan, authorizing
the repurchase of up to 69,792 shares of the Company's common stock. As of
December 31, 1999, 19,242 shares had been acquired at a total cost of $300,000.
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):
Emclaire Financial Corp. 18 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks and federal
funds sold $ 8,595 $ 8,595 $ 18,689 $ 18,689
Time deposits with others - - 100 100
Investment securities:
Available for sale 33,499 33,499 28,929 28,929
Held to maturity 2,278 2,269 3,392 3,419
Net loans 138,089 134,340 132,913 135,801
Accrued interest receivable 1,197 1,197 1,165 1,165
--------- --------- --------- ---------
$ 183,658 $ 179,900 $ 185,188 $ 188,103
========= ========= ========= =========
Financial liabilities
Deposits $ 168,425 $ 168,144 $ 169,870 $ 170,777
Borrowed funds 2,000 2,000 2,000 2,020
Accrued interest payable 376 376 420 420
--------- --------- --------- ---------
$ 170,801 $ 170,520 $ 172,290 $ 173,217
========= ========= ========= =========
</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.
Emclaire Financial Corp. 19 1999 Annual Report
<PAGE>
17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash on deposit in subsidiary bank $ 16 $ 19
Investment securities available for sale 935 1,344
Investment in bank subsidiary 19,700 19,665
Other assets 159 80
------- -------
TOTAL ASSETS $20,810 $21,108
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 6 $ 7
Stockholders' equity 20,804 21,101
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,810 $21,108
======= =======
</TABLE>
CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
INCOME
Dividends from subsidiary $ 1,023 $ 1,443
Other dividends 32 3
------- -------
Total Income 1,055 1,446
------- -------
EXPENSES 20 26
------- -------
Income before income taxes and equity in undistributed
earnings of subsidiary 1,035 1,420
Income tax benefit (4) (8)
------- -------
Income before equity in undistributed earnings in subsidiary 1,039 1,428
Equity in undistributed earnings in subsidiary 715 (105)
------- -------
NET INCOME $ 1,754 $ 1,323
======= =======
</TABLE>
Emclaire Financial Corp. 20 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,754 $ 1,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (715) 105
Other, net 61 (9)
------- -------
Net cash provided by operating activities 1,100 1,419
------- -------
INVESTING ACTIVITIES
Purchase of available for sale securities (8) (1,360)
Net proceeds from acquisition - 577
------- -------
Net cash used for investing activities (8) (783)
------- -------
FINANCING ACTIVITIES
Acquisition of treasury stock (300) -
Cash dividends paid (795) (623)
------- -------
Net cash used for financing activities (1,095) (623)
------- -------
Increase (decrease) in cash (3) 13
CASH AT BEGINNING OF YEAR 19 6
------- -------
CASH AT END OF YEAR $ 16 $ 19
======= =======
</TABLE>
Emclaire Financial Corp. 21 1999 Annual Report
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Emclaire Financial Corp.
We have audited the consolidated balance sheet of Emclaire Financial Corp. and
Subsidiary as of December 31, 1999 and 1998, 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, 1999 and 1998, 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 29, 2000
Emclaire Financial Corp. 22 1999 Annual Report
<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 operations 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.
OVERVIEW
Since January 1996, the Company has increased total assets $93.4 million, to
$192.0 million, through a series of branch openings, and purchases. This growth
has increased the number of offices from four to eleven, and expanded the
Company's operations into six counties. The single most significant event in
this expansion process was the purchase of Peoples Savings Financial Corporation
("Peoples") in August 1998. This acquisition added three branch offices and
increased total loans and total deposits approximately $35.5 million and $35.0
million, respectively.
During 1999, the Company concentrated on absorbing the expansion undertaken
during the past three years. As a result of its strategic planning process, a
number of personnel were hired, during the third and fourth quarters, to fill
open or newly-created managerial and staff positions. The positions filled
included credit administrator, operations officer, credit analyst, business
development officer, marketing director, and network administrator.
These staffing enhancements will allow the Company to implement its strategic
goals of improving customer service, expanding market share, and improving
financial performance.
During the fourth quarter of 1999, a stock repurchase plan was implemented under
which up to 69,792 shares or five percent of the outstanding common shares will
be repurchased. As of March 15, 2000, 42,312 shares have been acquired.
[GRAPHIC OMITTED]
RESULTS OF OPERATIONS
Summary
Net income for 1999, totaled $1.75 million, an increase of $431,000 or 33% from
1998. The increase in tax equivalent interest income, which rose $1.4 million or
21% to $8.2 million, was largely responsible for the increase in net income. The
$30.3 million or 29% increase in loan volume was the principal factor for the
increase in net interest income.
Other operating income rose $67,000 or 8% from 1998 to $860,000. Included in
1998's total is a $50,000 net gain from sales of other real estate owned. Such
gains in 1999 totaled $13,000.
Other operating expenses for the Company increased $813,000 or 15% to $6.2
million in 1999. Salaries and benefits accounted for $567,000 of this increase,
due to operating the four offices acquired or opened in 1998 for a full year,
combined with the employees added in 1999.
Earnings per share for 1999 increased 13% to $1.26 from the $1.12 reported for
1998. The improvement in earnings on a per share basis did not match the total
dollar increase in net income due to the full year effect of shares issued in
1998 in the Peoples acquisition.
Net interest income
The principal source of the Company's revenue is net interest income. Net
interest income is the difference between interest income on earning assets such
as loans and investment securities, and interest expense on liabilities, such as
deposits and borrowed funds, used to fund the earning assets. Net interest
income is impacted by the amount and composition of interest earning assets and
interest-bearing liabilities, and changes in the level of interest rates.
Changes in net interest income are most often measured in two ways 1) interest
spread and 2) net yield on earning assets. The difference between the yields on
earning assets and rates paid for interest-bearing funds
Emclaire Financial Corp. 23 1999 Annual Report
<PAGE>
represents the interest spread. The net yield on earning assets is the
percentage resulting from dividing net interest income by average earning
assets. In the following tables, both the interest spread and the net yield on
earning assets are presented on a tax-equivalent basis.
Tax-equivalent net interest increased $1.4 million or 21% to $8.2 million in
1999, due to an increase in the average volume of earning assets, which offset
the decline in the net interest margin. The increase in the volume of earning
assets is largely due to the full-year impact of the three branch offices
acquired in 1998.
The net interest spread was 3.81% in 1999 and 3.92% in 1998. This decrease is
consistent with that experienced by other financial institutions and results
from a combination of factors. The interest earning assets acquired in 1998
consist principally of residential mortgage loans, which provide a lower rate of
return than other loan products. The effect of these loans in 1999 was to reduce
the yield on earning assets by approximately 2 basis points. In addition, the
interest-bearing deposits for these purchased offices had a higher cost than the
remaining offices. This higher cost of funds increased the overall cost of funds
by approximately 17 basis points.
Average earning assets of $179.8 million in 1999, represented an increase of
$35.4 million or 24% from 1998. The full-year effect of the purchased assets
previously discussed, combined with net loan originations during the year,
accounted for the largest portion of the growth. The average balance of
interest-bearing deposits in other banks and federal funds sold increased $1.1
million and $3.8 million, respectively, to provide ready funds in the event of
any possible Y2K funding needs. Average total investment securities remained
largely unchanged from 1998 at $34.7 million. However, the mix of the securities
portfolio shifted as funds were invested in longer-term callable tax-exempt
securities, a strategy designed to improve the Company's tax position.
Tax equivalent interest income rose $2.4 million or 21% for 1999, due to the
increase in average earning assets previously discussed. This increase in
earning assets offset the decline in interest rates, particularly the decline in
the loan portfolio, which fell to 8.25%, due to the impact of the lower yielding
residential mortgage loans, previously discussed. The yield on earning assets
fell to 7.70% from 7.94%
Interest expense for 1999 totaled $5.6 million, an increase of $978,000 or 21%
from 1998. The rise in the volume of interest-bearing liabilities accounted for
the increase, more than offsetting the decline in the cost of funds, which fell
to 3.89% from 4.02%, as a result of the generally lower rate environment during
the first half of 1999.
Due to actions taken by the Federal Reserve Board, the prime interest rate rose
three times during 1999, for a combined increase of 75 basis points. If this
trend continues through 2000, the upward pressure on interest rates could
adversely impact the Company's net interest margin and lessen loan demand.
The following table presents interest income, interest expense, and net interest
income for 1999 and 1998. This table compares the daily average balances of
earning assets and interest-bearing liabilities with the related interest income
and expense, and the corresponding average interest rate earned or paid.
Tax-exempt asset yields have been adjusted to their tax equivalent yield based
on a marginal tax rate of 34%. The tax equivalent adjustment to interest income
was $194,000 and $130,000 for 1999 and 1998, respectively. Average investment
securities balances are computed based on amortized cost and exclude unrealized
gains and losses on securities available for sale. Average outstanding loans
include non-accrual loans (in thousands):
Emclaire Financial Corp. 24 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ---------------------------------
Average Yield/ Average Yield/
Volume Interest Rate Volume Interest Rate
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Investment securities
Taxable $ 28,830 $ 1,809 6.27% $ 30,297 $ 1,940 6.40%
Exempt from federal income tax 5,905 409 6.93 4,381 292 6.67
Interest bearing deposits in other banks 1,991 102 5.12 855 41 4.80
Loans 134,850 11,122 8.25 104,513 8,974 8.59
Federal funds sold 8,232 404 4.91 4,401 226 5.14
--------- --------- --------- ---------
Total interest-earning assets 179,808 13,846 7.70 144,447 11,473 7.94
--------- ---------
Noninterest-earning assets
Cash and due from banks 5,977 4,907
Unrealized (loss) gain on securities (215) 414
Allowance for loan losses (1,349) (1,035)
Other assets 9,718 7,332
--------- ---------
Total assets $ 193,939 $ 156,065
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 21,376 338 1.58% $ 18,669 329 1.76%
Money market accounts 21,612 678 3.14 18,785 607 3.23
Savings deposits 22,798 579 2.54 19,344 508 2.63
Time deposits 77,359 3,938 5.09 57,300 3,106 5.42
Obligation under capital lease 4 - - 42 2 4.76
Borrowed funds 2,028 114 5.62 2,083 117 5.62
--------- --------- --------- ---------
Total interest-bearing liabilities 145,177 5,647 3.89 116,223 4,669 4.02
--------- ---------
Noninterest-bearing liabilities
Demand deposits 26,601 22,731
Other liabilities 944 730
Capital 21,217 16,381
--------- ---------
Total liabilities and stockholders' equity $ 193,939 $ 156,065
========= =========
Net interest spread 3.81 3.92
==== ====
Net interest income and net yield on
interest-earning assets $ 8,199 4.56% $ 6,804 4.71%
========= ==== ========= ====
</TABLE>
Emclaire Financial Corp. 25 1999 Annual Report
<PAGE>
The following table presents changes in interest income, interest expense and
net interest income due to volume and rate variances for earning assets and
interest bearing liabilities (in thousands). Changes in interest not due solely
to changes in volume or rates are allocated proportionally.
<TABLE>
<CAPTION>
1999 Change From 1998 1998 Change From 1997
------------------------------ -------------------------------
Total Change Due To Total Change Due To
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Taxable investment securities $ (131) $ (93) $ (38) $ (339) $ (389) $ 50
Non-taxable investment securities 117 106 11 12 (7) 19
Interest bearing deposits in other
banks 61 58 3 40 40 -
Loans 2,148 2,515 (367) 1,985 2,228 (243)
Federal funds sold 178 188 (10) 137 143 (6)
------- ------- ------- ------- ------- -------
Total interest income 2,373 2,774 (401) 1,835 2,015 (180)
------- ------- ------- ------- ------- -------
INTEREST EXPENSE ON:
NOW accounts 9 45 (36) 34 39 (5)
Money market accounts 71 88 (17) 28 21 7
Savings deposits 71 88 (17) 65 91 (26)
Time deposits 832 1,031 (199) 768 635 133
Obligation under capital lease (2) (1) (1) (3) (2) (1)
Borrowed funds (3) (3) - 50 50 -
------- ------- ------- ------- ------- -------
Total interest expense 978 1,248 (270) 942 834 108
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 1,395 $ 1,526 $ (131) $ 893 $ 1,181 $ (288)
======= ======= ======= ======= ======= =======
</TABLE>
Provision for Loan Losses
Provisions for loan losses totaled $162,000 for 1999, a 19% decrease from the
$200,000 provided in 1998. In addition, the allowance for loan losses in 1998
was increased by approximately $349,000, as a result of the Peoples acquisition.
The allowance for loan losses totaled $1.37 million at December 31, 1999, an
increase of $37,000 or 3% from 1998.
The allowance for loan losses is periodically evaluated based on an assessment
of the losses inherent in the loan portfolio. Periodic provisions to the
allowance for loan losses are made 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
following table presents a summary of loan losses by loan type and changes in
the allowance for loan losses (in thousands):
Emclaire Financial Corp. 26 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total loans outstanding $139,462 $134,249 $ 86,144
======== ======== ========
Average loans outstanding $134,850 $104,513 $ 78,610
======== ======== ========
Allowance for loan losses at beginning of year $ 1,336 $ 874 $ 733
Provision charged to expense 162 200 220
Allowance related to loans acquired - 349 -
Charge-offs:
Commercial and industrial - - 1
Real estate 12 21 33
Consumer 143 92 74
-------- -------- --------
Total 155 113 108
-------- -------- --------
Recoveries:
Commercial and industrial - 9 2
Real estate - - 19
Consumer 30 17 8
-------- -------- --------
Total 30 26 29
-------- -------- --------
Net charge-offs 125 87 79
-------- -------- --------
Allowance for loan losses at end of period $ 1,373 $ 1,336 $ 874
======== ======== ========
Allowance for loan losses as a percent of total loans .98% 1.00% 1.01%
Net charge-offs as a percent of average loans .09 .08 .10
</TABLE>
Other Operating Income
Other operating income, comprised principally of fees and charges on customer
deposit accounts, increased $67,000 or 8% to $860,000 in 1999 from $793,000 in
1998. Included in the total for 1998 are gains of approximately $50,000, from
the sale of foreclosed real estate. In 1999, gains on sales of foreclosed real
estate totaled $13,000.
Service charges on customer accounts increased $70,000 or 13% to $621,000 due
principally to overdraft charges and returned check charges associated with the
increase in the number of checking accounts. These two fees accounted for
approximately 96% of the total service charge revenue. The operations acquired
in 1998 did not contribute significantly to the increase in fee income, due to
the low number of checking accounts maintained at these offices.
Excluding the effect of the gains on sales of foreclosed real estate, other
income increased $34,000 or 18% from 1998. Increases in fees from the
MasterMoney(TM) debit card product and an ATM convenience charge for
non-customers using a Farmers' ATM accounted for the increase.
Other Operating Expense
Other operating expense consists principally of employee salaries and benefits,
occupancy and equipment costs, and other operating costs such as telephone,
postage, ATM processing and intangible asset amortization. For 1999, these
expenses increased $813,000 or 15% from 1998 to $6.2 million. Excluding certain
non-recurring costs incurred in 1998 for equipment and software disposal,
implementing check imaging and upgrading data communication systems, other
operating expense increased $902,000 or 17%.
Salaries and employee benefits increased $567,000 or 23% in 1999 to $3.0
million. The full-year operation of the offices opened or acquired in 1998,
combined with the staff additions in 1999 discussed earlier, accounted for the
largest portion of the increase. The full-year impact of the branch operations
accounted for $210,000 of the total increase, while the salaries and benefits of
the additional employees totaled approximately $220,000. In addition, during
1999 the Company began using temporary employees to oversee the human resource
and training functions and to perform various clerical tasks. The use of these
temporary employees cost approximately $158,000. During 1999, the cost of
medical insurance benefits increased approximately 12% or $35,000, excluding the
impact of the new employees and added branch operations, due to premium
Emclaire Financial Corp 27 1999 Annual Report
<PAGE>
rate increases. After reviewing the existing health insurance program, it was
decided to convert the current program to a health maintenance organization
sponsored by the same provider. This change, which will take effect late in the
first quarter of 2000, results in a premium reduction of approximately 15%.
Occupancy and equipment expense increased $10,000 or 1% in 1999. Excluding a
$55,000 write-down of equipment in 1998, occupancy and equipment expense rose
$65,000 or 7%. Of this increase, $73,000 is due to additional costs related to
the full-year operation of the branch offices acquired or opened in 1998. The
data center and computer equipment put into service in 1998 resulted in
additional depreciation expense of approximately $27,000 in 1999. Net savings of
approximately $52,000 on equipment maintenance and repairs were realized in 1999
through the restructuring of various maintenance contracts. In addition, the
termination of several miscellaneous equipment rental agreements netted savings
of approximately $17,000. The remaining increase is the result of normal
increases for recurring costs such as utilities, building supplies and
maintenance.
Other expenses for 1999 totaled $2.2 million, a $236,000 or 12% increase from
1998. Excluding non-recurring costs totaling $36,000 in 1998 for the
implementation of check imaging and the write-down of software, other expenses
rose $270,000 or 14% in 1999. Note 9 of the accompanying consolidated financial
statements presents the principal components of other expenses. The increases in
the various components are due to the full-year impact of the branch offices
acquired or opened, along with the computer upgrade and completion of the data
center in 1998. Printing and office supply costs declined due to reduced costs
resulting from the conversion to check imaging, combined with a concerted effort
to control costs for pre-printed documents and other supplies. The
implementation of check imaging also helped maintain postage costs at a level
comparable to 1998. Processing fees for ATM and debit cards increased due to the
increased number of cards outstanding and the resulting increase in activity.
Income Tax Expense
Income tax expense for 1999 of $782,000 was 30.8% of pre-tax income. This ratio
equaled 1998, when income tax expense totaled $590,000. The tax-exempt income
from securities purchased in 1999 offset the impact of non-deductible goodwill
amortization, maintaining tax expense at approximately 31% of pre-tax income.
[GRAPHIC OMITTED]
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets declined slightly during 1999 and totaled 192.0 at December 31,
1999, a decrease of $2.1 million or 1% from 1998. This decrease was due to a
decline in total deposits, which fell $1.4 million or 1% during 1999.
During 1999, the Company redrafted its strategic plan and attempted to more
fully integrate the branch office operations acquired in 1998. This process will
continue into and beyond 2000, as the Company focuses on increasing its
relationship with existing customers and developing products and services to
attract new customers.
[GRAPHIC OMITTED]
Investment Securities
Total investment securities increased $3.5 million during 1999, to $35.8
million, as funds were invested in tax-exempt and U. S. government agency
securities. As discussed earlier, the purchase of tax-exempt securities was part
of a strategy to moderate the effective tax rate. During 1999, approximately
$2.5 million was invested in longer term, callable tax-exempt municipal
securities.
Information detailing the book value of the investment portfolio by security
type and classification is presented in Note 4 to the consolidated financial
statements. Additional information detailing the maturity and yield of the
investment portfolio is presented on page 33.
Emclaire Financial Corp 28 1999 Annual Report
<PAGE>
[GRAPHIC OMITTED]
Loans
The loan portfolio increased $5.2 million or 4% during the year and totaled
$139.4 million at December 31, 1999, as compared to $134.2 million in 1998.
During 1999, residential mortgage loans increased approximately $3.1 million,
while commercial real estate loans rose approximately $2.0 million. At December
31, 1999 residential mortgages comprised 65% of the loan portfolio. Prior to the
1998 acquisition, residential mortgages were approximately 53% of the loan
portfolio. While residential mortgage loans will continue to remain a
significant factor in the Company's lending activities, it is hoped the
additions made to the lending staff in 1999 will lead to more diversification of
the portfolio.
The following table presents the composition of the loan portfolio and the
percentage of loans by type (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ -----------------------
% of Loans % of Loans % of Loans
to to to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 14,660 10.5% $ 14,223 10.6% $11,147 12.9%
Commercial and multi-family real estate 20,360 14.6 18,381 13.7 15,188 17.6
1 - 4 family real estate 90,232 64.7 87,137 64.9 45,709 53.1
Consumer 14,210 10.2 14,508 10.8 14,100 16.4
-------- ------ -------- ----- ------- -----
Total loans 139,462 100.0% 134,249 100.0% 86,144 100.0%
====== ===== =====
Less: allowance for loan losses 1,373 1,336 874
-------- -------- -------
Net loans $138,089 $132,913 $85,270
======== ======== =======
</TABLE>
Loan Quality
The Company strives to maintain a high quality loan portfolio in order to
minimize the risk of credit loss. Setting and adhering to credit standards,
diversifying the portfolio and conducting periodic reviews of the portfolio help
achieve this goal.
Credit standards and procedures are detailed in the Company's lending policy.
This policy provides limits for individual, bank and board loan committee
lending authorities. This policy also details underwriting standards to be met
before funding any loan.
Diversification of the loan portfolio is measured by monitoring for
concentrations of commercial loans extended to a specific industry. At December
31, 1999, no concentrations of loans greater than 10% of total loans existed.
During 1999, several changes were implemented designed to improve credit
underwriting and administration, and the loan review function. Credit
underwriting and administration were improved with the hiring of an experienced
loan officer to supervise credit administration. In addition, a credit analyst
position was created to centralize and standardize the financial review of
commercial loan requests. Also, the quarterly loan review function was
outsourced during 1999.
Based on the results of the quarterly loan review, and considering historical
loan loss trends, management assesses the overall adequacy of the allowance for
loan losses. The Board of Directors reviews a summary of management's assessment
each quarter.
Loans are placed on non-accrual 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
non-accrual status is generally charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest
Emclaire Financial Corp 29 1999 Annual Report
<PAGE>
income based upon management's assessment of the collectibility of the account.
At December 31, 1999, the Company had loans totaling $86,000 greater than 90
days past due and accruing interest, and $617,000 in loans on non-accrual
status.
Of the total non-performing loans, $515,000 is to a single customer and is
classified as impaired. The borrower continues to operate under Chapter 11
bankruptcy protection. During 1999, $45,000 in payments were received on this
account and were applied to interest. As part of management's ongoing assessment
of its loan portfolio, $40,000 of the allowance for loan losses at December 31,
1999, has been allocated for these loans. Management believes the underlying
collateral adequately secures the Company.
The following table sets forth non-performing loans, along with non-accrual loan
interest data (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more and
accruing $ 86 $ 287 $ 171 $ 111 $ 77
Non-accrual loans 617 1,022 820 778 194
------- ------- ------ ------ -------
Non-performing loans $ 703 $ 1,309 $ 991 $ 889 $ 271
------- ------- ------ ------ -------
Other real estate owned 104 80 - - -
------- ------- ------ ------ -------
Total non-performing assets $ 807 $ 1,389 $ 991 $ 889 $ 271
======= ======= ====== ====== =======
Non-performing loans to total loans .50% .98% 1.15% 1.30% .42%
Allowance for loan losses to non-
performing loans 195.31 102.06 88.19 82.45 253.51
Non-performing loans to total assets .37 .67 .74 .69 .27
Non-accrual loan interest data:
Interest computed on original terms $ 59
=======
Interest recognized in income $ 46
=======
</TABLE>
An experienced collection manager was hired as part of the staffing changes made
during 1999. This increased focus on identifying and working with past due and
other potential problem accounts resulted in $582,000 or 42% reduction of
non-performing assets.
At December 31, 1999, 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 current risk elements in the loan portfolio, management believes
the allowance for loan losses at December 31, 1999 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 (in thousands):
Emclaire Financial Corp. 30 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-------------------------- ------------------------
% of Loans % of Loans
to to
Amount Total Loans Amount Total Loans
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Commercial and industrial $ 152 10.5% $ 30 10.6%
Commercial & multi-family real estate 331 14.6 153 13.7
1-4 family real estate 55 64.7 49 64.9
Consumer 302 10.2 291 10.8
Unallocated 533 - 813 -
------- ----- ------- -----
$ 1,373 100.0% $ 1,336 100.0%
======= ===== ======= =====
</TABLE>
Deposits
Total deposits decreased $1.4 million or 1% in 1999 due to a decline in time
certificates of deposit. These time deposits fell $5.5 million during the year
offsetting increases in such core deposits as regular checking, savings and
money market accounts. The offices acquired in 1998 accounted for $3.1 million
of the decline in time deposits, as attempts are made to reconfigure the deposit
portfolio for these offices, by increasing the volume of core deposits and
reducing reliance on time deposits with above-market rates of interest. The
balance of the decline in time deposits can be attributed to increased
competition from other traditional and non-traditional financial service
providers. Such competition is expected to continue and most likely to increase
as funds are needed to support future growth.
The average balance sheet presented at "RESULTS OF OPERATIONS - Net Interest
Income" details the average amount and average interest rate paid on deposit
accounts during 1999 and 1998. Information related to the maturity of time
deposits of $100,000 and over at December 31, 1999 is presented in Note 8 of the
accompanying consolidated financial statements.
[GRAPHIC OMITTED]
Stockholders' Equity
From year-end 1995 through December 1998, stockholders' equity increased $12.1
million or 134% due to the combination of net retained earnings, the sale of
230,800 additional shares in 1996, and the issuance of 314,399 shares in 1998 as
part of the Peoples acquisition. During that same period, total assets rose
$95.5 million or 97%. The disproportionate growth in equity adversely impacted
the Company's return on average equity, which fell from 13.6% to 8.1%, despite
increasing the dividend payout ratio from 31% to 45% of net income.
For 1999, stockholders' equity decreased $297,000 or 1% to $20.8 million. This
decrease was due to several factors including maintaining the dividend payout
ratio at approximately 45% of net income, the unrealized loss on available for
sale investment securities and the acquisition of treasury stock as part of the
Company's stock repurchase plan.
During the fourth quarter of 1999 the Board of Directors approved a plan to
repurchase up to five percent of the Company's outstanding shares. As of March
15, 2000, 42,312 shares have been acquired at a total cost of $655,000. It is
anticipated this repurchase plan will be completed during the second quarter of
2000.
Emclaire Financial Corp. 31 1999 Annual Report
<PAGE>
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. The Company's market risk is comprised principally of interest
rate risk. The Company's Asset/Liability committee is responsible for reviewing
the interest rate sensitivity position of the Company and establishing policies
to monitor and limit exposure to interest rate risk. The guidelines established
by the Asset/Liability committee are subject to review by the Company's Board of
Directors.
Asset/Liability Management
One of the principal functions of the Company's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates.
Interest rate sensitivity is the relationship of differences in the amounts and
repricing dates of interest-earning assets and interest-bearing liabilities. In
order to measure the impact on net interest income and pre-tax income, and to
limit the adverse effect on earnings due to interest rate changes, Emclaire
monitors interest rate sensitivity through gap and simulation analyses. The
Company's gap model includes certain assumptions based on past experience and
expected customer behavior during periods of rising or falling interest rates.
These assumptions deal primarily with the interest rate changes for deposit
accounts with no fixed maturity, such as savings, NOW and money market accounts.
These assumptions have been developed through consideration of past events
combined with estimates of future pricing practices.
The Company's policy is to limit the adverse change in annual pre-tax income to
5%, based on an immediate change in interest rates of 200 basis points. At
December 31, 1999, pre-tax income would be impacted by such a change in interest
rates as follows:
Cumulative gap at 1 year (8.9%)
Impact on pre-tax earnings
+200 basis points (4.8 )
-200 basis points 3.4
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.
For 1999 operating activities, as presented in the statement of cash flows in
the accompanying consolidated financial statements, provided $2.8 million in
cash as compared to $2.1 million in 1998. These funds were generated principally
from net income, and depreciation and amortization.
Investing activities for 1999 used $10.3 million as compared to $4.7 million
used in 1998. During 1999, net loans totaling $5.4 million were originated, as
compared to $12.4 million in 1998. Investment security maturities totaling $8.9
million and other available funds were used to purchase $13.9 million of
investment securities. During 1998, investment activity provided cash of $6.2
million. Purchases of premises and equipment totaled $149,000 in 1999, as
compared to $1.1 million in 1998, when the Company completed construction of the
data center and computer systems upgrade. For 2000, a renovation of the
Brookville office is scheduled along with the relocation of the DuBois branch
office. The capital outlay for these projects is estimated at approximately
$300,000.
Financing activities consisted of the solicitation and repayment of customer
deposits, common stock repurchases, and the payment of dividends. For 1999,
these activities used $2.6 million, as compared to cash provided in 1998 of
$16.3 million, due to net deposit activity. At December 31, 1999 certificates of
deposit scheduled to mature in one year or less total $42.6 million.
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, 1999 (in
thousands). Securities with no fixed maturity represent marketable equity
securities and stock of the Federal Reserve and Federal Home Loan Banks:
Emclaire Financial Corp 32 1999 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Available for Sale After 1 Year After 5 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 $ 3,992 $ - $ - $ - $ - $ 3,992
U. S. Government Agency 1,000 9,944 - - - 10,944
Obligations of states and political
subdivisions 480 3,120 653 2,972 - 7,225
Corporate 2,752 7,280 - - - 10,032
Mortgage-backed securities - 4 - - - 4
Equity securities - - - - 2,307 2,307
------- ------- ----- ------- ------- -------
Total $ 8,224 $20,348 $ 653 $ 2,972 $ 2,307 $34,504
======= ======= ===== ======= ======= =======
Yield 6.47% 6.50% 6.61% 7.59% N/A 6.60%
Held to Maturity
U. S. Treasury $ 1,001 $ - $ - $ - $ - $ 1,001
Corporate 1,014 - - - - 1,014
Mortgage-backed securities - - - 263 - 263
------- ------- ----- ------- ------- -------
Total $ 2,015 $ - $ - $ 263 $ - $ 2,278
======= ======= ===== ======= ======= =======
Yield 6.18% -% -% 6.53% N/A 6.22%
</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, 1999 (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 $ 1,005 $ 6,997 $ 6,658 $14,660
Commercial and multi-family real estate 399 2,404 17,557 20,360
------- ------- ------- -------
$ 1,404 $ 9,401 $24,215 $35,020
======= ======= ======= =======
Predetermined interest rates $ 684 $ 7,557 $11,940 $20,181
Floating interest rates 720 1,844 12,275 14,839
------- ------- ------- -------
$ 1,404 $ 9,401 $24,215 $35,020
======= ======= ======= =======
</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
Emclaire Financial Corp 33 1999 Annual Report
<PAGE>
repayments and loan fundings. At December 31, 1999, loan and letter of credit
commitments totaled $12.8 million. Many of these commitments are in the form of
lines of credit and letters of credit which are available for use by the
borrower, but are generally not drawn on.
Capital Resources
Capital adequacy is the ability of the Company to support growth while
protecting the interests of shareholders and depositors. 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, 1999.
The accompanying consolidated financial statements present in Note 14, the
Company's regulatory capital position at December 31, 1999, as compared to the
minimum regulatory capital requirements imposed on the Company by regulators.
Management is not aware of any actions contemplated by banking regulators, which
would result in the Company being in non-compliance with any of the above
requirements.
YEAR 2000
During 1999, the Company completed the process of preparing for the Year 2000
date change. This process involved identifying and remediating date recognition
problems in computer systems, software and other operating equipment, working
with third parties to address their Y2K issues, and developing contingency plans
to address potential risks in the event of year 2000 failures. To date the
transition has been successfully managed.
Although considered unlikely, problems in core business processes, including
problems associated with noncompliant third parties and disruptions to the
economy in general, could still occur despite efforts to date to remediate
affected systems and develop contingency plans. The Company plans to continue
monitoring all business processes, including business customers, vendors and
other third parties, throughout 2000 to address any issues and ensure all
processes continue to function properly.
[GRAPHIC OMITTED]
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, markdown, or
commission, and may not represent actual transactions. The following table
summarizes the high and low prices without retail mark-up, markdown or
commission, and may not represent actual transactions. Prices are based upon
information made available to the Company. Cash dividends are declared on a
quarterly basis.
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
Dividend Dividend
High Low Declared High Low Declared
-------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 21.00 $ 19.00 $ .14 $ 22.00 $ 17.00 $ .12
Second Quarter 19.00 17.00 .14 24.00 21.00 .12
Third Quarter 17.63 16.00 .14 24.00 21.75 .12
Fourth Quarter 16.25 14.50 .15 23.00 21.00 .14
</TABLE>
At December 31, 1999, the Company had 730 shareholders of record.
Emclaire Financial Corp. 34 1999 Annual Report
<PAGE>
BOARD OF DIRECTORS
Ronald L. Ashbaugh
Retired President
Emclaire Financial Corp. and
Farmers National Bank
David L. Cox
President, Chairman and CEO
Emclaire Financial Corp. and
Farmers National Bank
Bernadette H. Crooks
Retired Retailer
Crooks Clothing
George W. Freeman
Freeman's Tree Farm
Rodney C. Heeter
Heeter Lumber, Co.
Robert L. Hunter
Hunter Truck Sales and Service
Hunter Leasing
J. Michael King
Senior Partner
Lynn, King & Schreffler
Attorneys at Law
John B. Mason
H. B. Beels & Sons, Inc.
Brian C. McCarrier
President - Interstate Pipe and Supply
Elizabeth C. Smith
Retired
Former Owner-The Inn at Oakmont
Director Emeritus
Dr. Clinton R. Coulter
Retired Medical Doctor
The above listed persons are members of the Boards of Directors of both the
Company and the Bank.
EXECUTIVE OFFICERS
Emclaire Financial Corp.
David L. Cox
President and Chief Executive
Officer
John J. Boczar, CPA
Secretary/Treasurer
Farmers National Bank
David L. Cox
President and Chief Executive
Officer
John J. Boczar, CPA
Vice President and Chief Financial
Officer
Elizabeth J. Eiseman
Vice President - Operations
Robert W. Foust
Vice President - Business
Development
Raymond M. Lawton
Vice President - Credit
Administration
Fred S. Port
Vice President - Branch
Administration
OTHER OFFICERS
Edith M. Beckwith
Manager - Eau Claire
Sue L. Bricen
Manager - Ridgway
Frank Calderone
Manager - DuBois
Scott B. Daum
Assistant Vice President -
Data Operations
Janice F. Dittman
Manager - Data Processing
Cindy L. Elder
Assistant Vice President
Manager - Emlenton
Richard E. Grejda
Assistant Vice President
Manager - Clarion
Andrew M. Hogue
Compliance and Security
Allan I. Johnson
Manager - Knox
James W. LeVier
Assistant Vice President
Credit Analyst
Timothy G. Slaugenhoup
Manager - Clarion Mall
C. Sue Solida
Manager- Brookville
Karen A. Spinetti
Manager - Bon Aire and East
Brady
David J. Stuber
Marketing Director
Judy L. Winters
Collection Manager
Emclaire Financial Corp. 35 1999 Annual Report
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<NAME> Emclaire Financial Corp.
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<FISCAL-YEAR-END> DEC-12-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-12-1999
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0
0
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</TABLE>
