UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from: ___________ to ___________
Commission File Number: 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 (I.R.S. Employer Identification No.)
incorporation or organization)
612 Main Street, Emlenton, PA 16373
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(Address of principal executive office) (Zip Code)
Issuer's telephone number: 724 867-2311
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.25 per share
(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 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 [ ] NO [X].
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. $15,928,000
As of March 8, 2002, there were issued and outstanding 1,332,835 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 8, 2002, was $18,312,941 ($16.90 per share
average bid and ask prices of $16.80 and $17.00, respectively, based on
1,083,606 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended December 31, 2001 (Parts I, II, and IV).
2. Portions of the Proxy Statement for the May 21, 2002 Annual Meeting
of Stockholders (Part III).
Transition Small Business Disclosure Format (Check one) YES [ ] NO [X]
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EMCLAIRE FINANCIAL CORP.
TABLE OF CONTENTS
PART I
Item 1. Description of Business.........................................1
Item 2. Description of Properties......................................16
Item 3. Legal Proceedings..............................................17
Item 4. Submission of Matters to a Vote of Security Holders............17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......17
Item 6. Management's Discussion and Analysis or Plan of Operation......17
Item 7. Financial Statements...........................................17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................17
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............18
Item 10. Executive Compensation.........................................18
Item 11. Security Ownership of Certain Beneficial Owners and Management.18
Item 12. Certain Relationships and Related Transactions.................18
Item 13. Exhibits and Reports on Form 8-K...............................19
Signatures ...............................................................20
PART I
Item 1. Description of Business
General
Emclaire Financial Corp. (the Corporation) is a Pennsylvania corporation and
bank holding company that provides a full range of retail and commercial
financial products and services to customers in western Pennsylvania through its
wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the Bank).
The Bank was organized in 1900 as a national banking association and is a
financial intermediary whose principal business consists of attracting deposits
from the general public and investing such funds in real estate loans secured by
liens on residential and commercial property, consumer loans, commercial
business loans, marketable securities and interest-earning deposits. The Bank
operates through a network of ten retail branch offices in Venango, Butler,
Clarion, Clearfield, Elk and Jefferson counties, Pennsylvania. The Corporation
and the Bank are headquartered in Emlenton, Pennsylvania.
The Corporation and the Bank are subject to examination and comprehensive
regulation by the Office of the Comptroller of the Currency (OCC), which is the
Bank's chartering authority, and the Federal Deposit Insurance Corporation
(FDIC), which insures customer deposits held by the Bank to the full extent
provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland
(FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a
registered bank holding company pursuant to the Bank Holding Company Act of 1956
(BHCA), as amended.
At December 31, 2001, the Corporation had $216.7 million in total assets, $21.1
million in stockholders' equity, and $189.5 million in deposits.
Lending Activities
General. The principal lending activities of the Bank are the origination of
residential mortgage, commercial mortgage, commercial business and consumer
loans. Generally, loans are originated in the Bank's primary market area.
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured
by one-to-four family residences located in the Bank's primary lending area.
Typically such residences are single-family owner occupied units. The Bank is an
approved, qualified lender for the Federal Home Loan Mortgage Corporation
(FHLMC). As a result, the Bank may sell loans to and service loans for the
FHLMC.
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 29.1% of the total loan portfolio at December 31, 2001. Commercial real
estate loans generally consist of loans granted for commercial purposes secured
by commercial or other nonresidential real estate. Commercial loans consist of
secured and unsecured loans for such items as capital assets, inventory,
operations, and other commercial purposes.
Consumer Loans. Consumer loans generally consist of fixed-rate term loans for
automobile purchases, home improvements not secured by real estate, capital, and
other personal expenditures. 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.
1
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, 2001, the Bank's loans-to-one borrower limit based upon 15% of
unimpaired capital was $2.9 million. At December 31, 2001, 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, 2001, all of
these loans were performing in accordance with their terms.
The following table sets forth the composition and percentage of the
Corporation's loans receivable in dollar amounts and in percentages of the
portfolio as of December 31:
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(Dollar amounts
in thousands) 2001 2000 1999 1998 1997
-------------------- ------------------- ---------------------- --------------------- ----------------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
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Mortgage loans:
Residential $100,420 62.0% $92,429 60.9% $90,232 64.7% $87,137 64.9% $45,709 53.1%
Commercial 26,470 16.3% 24,661 16.2% 20,360 14.6% 18,381 13.7% 15,188 17.6%
-------- --------- -------- ------- ------- ------- -------- --------- --------- --------
Total real
estate loans 126,890 78.3% 117,090 77.1% 110,592 79.3% 105,518 78.6% 60,897 70.7%
Other loans:
Commercial
business 20,806 12.9% 20,084 13.2% 14,660 10.5% 14,223 10.6% 11,147 12.9%
Consumer 14,308 8.8% 14,618 9.6% 14,210 10.2% 14,508 10.8% 14,100 16.4%
-------- --------- -------- ------- ------- ------- -------- --------- --------- --------
Total other
loans 35,114 21.7% 34,702 22.9% 28,870 20.7% 28,731 21.4% 25,247 29.3%
-------- --------- -------- ------- ------- ------- -------- --------- --------- --------
Total loans
receivable 162,004 100.0% 151,792 100.0% 139,462 100.0% 134,249 100.0% 86,144 100.0%
========= ======= ======= ========= ========
Less:
Allowance for
loan losses 1,464 1,460 1,373 1,336 874
-------- -------- ------- -------- ---------
Net loans
receivable $160,540 $150,332 $138,089 $132,913 $85,270
======== ========= ======== ======== =========
The following table sets forth the scheduled contractual principal repayments or
interest repricing of loans in the Corporation's portfolio as of December 31,
2001. Demand loans having no stated schedule of repayment and no stated maturity
are reported as due within one year.
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(In thousands) Due in one Due from one Due from five Due after
year or less to five years to ten years ten years Total
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Residential mortgage $ 23,180 $ 43,942 $ 21,507 $ 11,791 $ 100,420
Commercial mortgage 11,024 12,189 2,517 740 26,470
Commercial business 11,357 6,360 2,908 181 20,806
Consumer 10,015 4,154 129 10 14,308
--------------- --------------- ---------------- ---------------- ---------------
$ 55,576 $ 66,645 $ 27,061 $ 12,722 $ 162,004
=============== =============== ================ ================ ===============
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The following table sets forth the dollar amount of the Corporation's fixed- and
adjustable-rate loans as of December 31:
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(In thousands) Fixed Adjustable
rates rates
--------------------------------------------------------------------------------------------------------
Residential mortgage $ 95,352 $ 5,068 $ 100,420
Commercial mortgage 13,169 13,301 $ 26,470
Commercial business 11,467 9,339 $ 20,806
Consumer 12,712 1,596 $ 14,308
---------------- ---------------
$ 132,700 $ 29,304
================ ===============
2
Contractual maturities of loans do not reflect the actual term of the
Corporation's loan portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
enforcement of due-on-sale clauses, which give the Corporation the right to
declare a loan immediately payable in the event, among other things, that the
borrower sells the real property subject to the mortgage. Scheduled principal
amortization also reduces the average life of the loan portfolio. The average
life of mortgage loans tends to increase when current market mortgage rates
substantially exceed rates on existing mortgages and conversely, decrease when
rates on existing mortgages substantially exceed current market interest rates.
Delinquencies and Classified Assets
Delinquent Loans and Real Estate Acquired Through Foreclosure (REO). Typically,
a loan is considered past due and a late charge is assessed when the borrower
has not made a payment within fifteen days from the payment due date. When a
borrower fails to make a required payment on a loan, the Corporation attempts to
cure the deficiency by contacting the borrower. The initial contact with the
borrower is made shortly after the seventeenth day following the due date for
which a payment was not received. In most cases, delinquencies are cured
promptly.
If the delinquency exceeds 60 days, the Corporation works with the borrower to
set up a satisfactory repayment schedule. Typically loans are considered
non-accruing upon reaching 90 days delinquency, although the Corporation may be
receiving partial payments of interest and partial repayments of principal on
such loans. When a loan is placed in non-accrual status, previously accrued but
unpaid interest is deducted from interest income. The Corporation institutes
foreclosure action on secured loans only if all other remedies have been
exhausted. If an action to foreclose is instituted and the loan is not
reinstated or paid in full, the property is sold at a judicial or trustee's sale
at which the Corporation may be the buyer.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, management periodically
performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate. The Corporation generally attempts to sell its REO properties as soon as
practical upon receipt of clear title. The original lender typically handles
disposition of those REO properties resulting from loans purchased in the
secondary market.
As of December 31, 2001, the Corporation's non-performing assets, which include
non-accrual loans, loans delinquent due to maturity, troubled debt restructuring
and REO, amounted to $1.3 million or 0.59% of the Corporation's total assets.
Classified Assets. Regulations applicable to insured institutions require the
classification of problem assets as "substandard," "doubtful," or "loss"
depending upon the existence of certain characteristics as discussed below. A
category designated "special mention" must also be maintained for assets
currently not requiring the above classifications but having potential weakness
or risk characteristics that could result in future problems. An asset is
classified as substandard if not adequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. A
substandard asset is characterized by the distinct possibility that the
Corporation will sustain some loss if the deficiencies are not corrected. Assets
classified as doubtful have all the weaknesses inherent in those classified as
substandard. In addition, these weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible and of such little value that their continuance as assets is not
warranted.
The Corporation's classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by management.
Valuation allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities. When the
Corporation classifies a problem asset as a loss, the asset is charged off
within a reasonable period of time.
3
The Corporation regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Corporation's policy and applicable regulations. As of December 31, 2001, the
Corporation's classified and criticized assets amounted to $10.6 million with
$3.2 million classified as substandard, $200,000 classified as doubtful and $7.2
million identified as special mention.
The following table sets forth information regarding the Corporation's
non-performing assets as of December 31:
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(Dollar amounts in thousands) 2001 2000 1999 1998 1997
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Non-performing loans $ 1,245 $ 900 $ 703 $ 1,309 $ 991
Total as a percentage of gross loans 0.78% 0.59% 0.50% 0.98% 1.15%
------------- ------------- ------------- ------------- -------------
Real estate acquired through foreclosure 20 33 104 80 -
------------- ------------- ------------- ------------- -------------
Total as a percentage of total assets 0.01% 0.02% 0.05% 0.04% 0.00%
------------- ------------- ------------- ------------- -------------
Total non-performing assets $ 1,265 $ 933 $ 807 $ 1,389 $ 991
============= ============= ============= ============= =============
Total non-performing assets
as a percentage of total assets 0.58% 0.48% 0.42% 0.72% 0.74%
============= ============= ============= ============= =============
Allowance for loan losses as a
percentage of non-performing loans 117.59% 162.22% 195.31% 102.06% 88.19%
============= ============= ============= ============= =============
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Allowance for Loan Losses. Management establishes reserves for estimated losses
on loans based upon its evaluation of the pertinent factors underlying the types
and quality of loans; historical loss experience based on volume and types of
loans; trend in portfolio volume and composition; level and trend on
non-performing assets; detailed analysis of individual loans for which full
collectibility may not be assured; determination of the existence and realizable
value of the collateral and guarantees securing such loans; and the current
economic conditions affecting the collectibility of loans in the portfolio. The
Corporation analyzes its loan portfolio and REO properties each month to
determine the adequacy of its allowance for losses. Based upon the factors
discussed above, management believes that the Corporation's allowance for losses
as of December 31, 2001 of $1.5 million is adequate to cover potential losses
inherent in the portfolio.
The following table sets forth an analysis of the allowance for losses on loans
receivable for the years ended December 31:
----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 1,460 $ 1,373 $ 1,336 $ 874 $ 733
Provision for loan losses 154 209 162 200 220
Allowance for loan losses of acquired companies - - - 349 -
Charge-offs:
Mortgage loans (27) (34) (12) (21) (33)
Consumer and commercial business loans (170) (122) (143) (92) (75)
------------ ------------ ------------ ------------ ------------
(197) (156) (155) (113) (108)
Recoveries 47 34 30 26 29
------------ ------------ ------------ ------------ ------------
Balance at end of period $ 1,464 $ 1,460 $ 1,373 $ 1,336 $ 874
============ ============ ============ ============ ============
Ratio of net charge-offs to average loans outstanding 0.10% 0.08% 0.09% 0.08% 0.10%
============ ============ ============ ============ ============
Ratio of allowance to total loans at end of period 0.90% 0.96% 0.98% 1.00% 1.01%
============ ============ ============ ============ ============
Balance at end of period applicable to:
Mortgage loans $ 607 $ 704 $ 613 $ 596 $ 390
Consumer and commercial business loans 857 756 760 740 484
------------ ------------ ------------ ------------ ------------
Balance at end of period $ 1,464 $ 1,460 $ 1,373 $ 1,336 $ 874
============ ============ ============ ============ ============
-------------------------------------------------------------------------------------------------------------------------------
4
Investment Portfolio
General. The Corporation maintains an investment portfolio of securities such as
U.S. government and agency securities, state and municipal debt obligations,
corporate notes and bonds, and to a lesser extent, mortgage-backed and equity
securities. Management generally maintains an investment portfolio with
relatively short maturities to minimize overall interest rate risk. However, at
December 31, 2001 approximately $9.4 million was invested in longer-term
callable municipal securities, as part of strategy to moderate federal income
taxes. The Bank has no investment with any one issuer in an amount greater than
10% of capital.
Investment decisions are made within policy guidelines established by the Board
of Directors. This policy is aimed at maintaining a diversified investment
portfolio, which complements the overall asset/liability and liquidity
objectives of the Bank, while limiting the related credit risk to an acceptable
level.
The following table sets forth certain information regarding the amortized cost,
fair value, weighted average yields and contractual maturities of the
Corporation's securities as of December 31, 2001:
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(In thousands) Due in one Due from one Due after No scheduled
year or less to five years ten years maturity Total
------------------------------------------------------------------------------------------------------------------------------
U.S. Government securities $ 3,999 $ 7,480 $ 1,499 $ - $ 12,978
Mortgage-backed securities - - 60 - 60
Municipal securities 215 2,336 9,368 - 11,919
Corporate securities 2,249 10,015 - - 12,264
Equity securities - - - 971 971
--------------- ---------------- --------------- ---------------- ---------------
$ 6,463 $ 19,831 $ 10,927 $ 971 $ 38,192
=============== ================ =============== ================ ===============
Estimated fair value $ 6,545 $ 20,247 $ 10,747 $ 1,217 $ 38,756
=============== ================ =============== ================ ===============
Weighted average yield (1) 4.70% 5.88% 7.20% 4.12% 6.01%
=============== ================ =============== ================ ===============
(1) Weighted average yield is on a taxable equivalent basis and is calculated
based upon amortized cost.
------------------------------------------------------------------------------------------------------------------------------
For additional information regarding the Corporation's investment portfolio see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes to Consolidated Financial Statements" in the Annual
Report incorporated herein by reference.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
investing activities. Secondary sources of funds are derived from loan
repayments and investment maturities. Loan repayments can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates and general market conditions. The Bank also has access to
funds through credit facilities available from 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.
5
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. Management reviews interest rates on deposits weekly and considers a
number of factors, including (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
For a additional information regarding the Corporation's deposit base and
borrowed funds see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Notes to Consolidated Financial Statements" in
the Annual Report incorporated herein by reference.
Subsidiary Activity
The Corporation has one wholly owned subsidiary, the Bank, a national
association. As of December 31, 2001, the Bank had no subsidiaries.
Personnel
At December 31, 2001, the Bank had 103 full time equivalent employees. There is
no collective bargaining agreement between the Bank and its employees, and the
Bank believes its relationship with its employees to be satisfactory.
Competition
The banking and financial services industry in Pennsylvania generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in terms of total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Bank. In
addition, recent federal legislation may have the effect of further increasing
the pace of consolidation within the financial services industry. See "Item 1.
Business - Supervision and Regulation - Financial Services Modernization
Legislation."
Risk Factors
The following discusses certain factors that may affect the Corporation's
financial condition and results of operations and should be considered in
evaluating the Corporation.
Ability Of The Corporation To Execute Its Business Strategy. The financial
performance and profitability of the Corporation will depend, in large part, on
its ability to favorably execute its business strategy. This execution entails
risks in, among other areas, technology implementation, market segmentation,
brand identification, banking operations, and capital and human resource
investments. Accordingly, there can be no assurance that the Corporation will be
successful in its business strategy.
Economic Conditions And Geographic Concentration. The Corporation's operations
are located in western Pennsylvania and are concentrated in Venango, Clarion and
Butler Counties, Pennsylvania. Although management has diversified the
Corporation's loan portfolio into other Pennsylvania counties, and to a very
limited extent into other states, the vast majority of the Corporation's credits
remain concentrated in the three primary counties. As a result of this
geographic concentration, the Corporation's results depend largely upon economic
and real estate market conditions in these areas. Deterioration in economic or
real estate market conditions in the Corporation's primary market areas could
have a material adverse impact on the quality of the Corporation's loan
portfolio, the demand for its products and services, and its financial condition
and results of operations.
6
Interest Rates. By nature, all financial institutions are impacted by changing
interest rates, due to the impact of such upon:
-- the demand for new loans
-- prepayment speeds experienced on various asset classes, particularly
residential mortgage loans
-- credit profiles of existing borrowers
-- rates received on loans and securities
-- rates paid on deposits and borrowings.
As presented previously, the Corporation is financially exposed to parallel
shifts in general market interest rates, changes in the relative pricing of the
term structure of general market interest rates, and relative credit spreads.
Therefore, significant fluctuations in interest rates may present an adverse
effect upon the Corporation's financial condition and results of operations.
Government Regulation And Monetary Policy. The financial services industry is
subject to extensive federal and state supervision and regulation. Significant
new laws, changes in existing laws, or repeals of present laws could cause the
Corporation's financial results to materially differ from past results. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for the Corporation, and a
material change in these conditions could present an adverse impact on the
Corporation's financial condition and results of operations.
Competition. The financial services business in the Corporation's market areas
is highly competitive, and is becoming more so due to technological advances
(particularly Internet based financial services delivery), changes in the
regulatory environment, and the enormous consolidation that has occurred among
financial services providers. Many of the Corporation's competitors are much
larger in terms of total assets and market capitalization, enjoy greater
liquidity in their equity securities, have greater access to capital and
funding, and offer a broader array of financial products and services. In light
of this environment, there can be no assurance that the Corporation will be able
to compete effectively. The results of the Corporation may materially differ in
future periods depending upon the nature or level of competition.
Credit Quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors, and related parties may
fail to perform in accordance with the terms of their loans. The Corporation has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for loan losses, that
management believes are appropriate to control this risk by assessing the
likelihood of non-performance, tracking loan performance, and diversifying the
credit portfolio. Such policies and procedures may not, however, prevent
unexpected losses that could have a material adverse effect on the Corporation's
financial condition or results of operations. Unexpected losses may arise from a
wide variety of specific or systemic factors, many of which are beyond the
Corporation's ability to predict, influence, or control.
Other Risks. From time to time, the Corporation details other risks with respect
to its business and financial results in its filings with the SEC.
Economic Conditions, Government Policies, Legislation, and Regulation
The Corporation's profitability, like most financial institutions, primarily
depends on interest rate differentials. In general, the difference between the
interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Corporation's earnings. These rates are highly sensitive to many factors that
are beyond the control of the Corporation and the Bank, such as inflation,
recession and unemployment, and the impact that future changes in domestic and
foreign economic conditions might have on the Corporation and the Bank cannot be
predicted.
7
The business of the Corporation is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the Federal
Reserve Board). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the
Corporation and the Bank of any future changes in monetary and fiscal policies
cannot be predicted.
From time to time, new legislation and regulations have the effect of increasing
the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial services
providers. Proposals to change the laws and regulations governing the operations
and taxation of banks, bank holding companies, and other financial institutions
and financial services providers are frequently made in the U.S. Congress, in
the state legislatures, and before various regulatory agencies. This legislation
may change banking statutes and the operating environment of the Corporation and
its subsidiaries in substantial and unpredictable ways. If enacted, such
legislation could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. The
Corporation cannot predict whether any of this potential legislation will be
enacted, and if enacted, the effect that it, or any implementing regulations,
would have on the financial condition or results of operations of the
Corporation or the Bank. See "Item 1. Business - Supervision and Regulation."
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 Corporation and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
Regulation - The Corporation
The Corporation, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act (BCHA). The Corporation is required to file
quarterly reports and annual reports with the Federal Reserve Board and such
additional information as the FRB may require pursuant to the BHCA. The FRB may
conduct examinations of the Corporation and its subsidiaries.
The Federal Reserve Board may require that the Corporation terminate an
activity, or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including the authority to impose interest rate ceilings
and reserve requirements on such debt. Under certain circumstances, the
Corporation must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Further, the Corporation is required by the Federal Reserve Board to maintain
certain levels of capital. See "Regulation - The Bank - Capital Standards."
The Corporation is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Corporation and another bank holding
company.
8
The Corporation is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, the Corporation, subject to the prior
approval of the Federal Reserve Board, may engage in, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be
proper incidents thereto.
Under Federal Reserve Board regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve Board's policy that a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
The Corporation's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Corporation is subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Exchange Act.
Regulation - The Bank
The Bank is subject to supervision and examination by the OCC and the FDIC. 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.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted
in response to the terrorist attacks in New York, Pennsylvania and Washington,
D.C. on September 11, 2001, the Patriot Act is intended is to strengthen U.S law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Act on
financial institutions of all kinds is significant and wide ranging. The Act
contains sweeping anti-money laundering and financial transparency laws and
requires various regulations, including:
-- due diligence requirements for financial institutions that administer,
maintain, or manage private banks accounts or correspondent accounts
for non-US persons
-- standards for verifying customer identification at account opening
-- rules to promote cooperation among financial institutions, regulators,
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering
-- reports by nonfinancial trades and businesses filed with the Treasury
Department's Financial Crimes Enforcement Network for transactions
exceeding $10,000, and
-- filing of suspicious activities reports securities by brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
The Corporation is not able to predict the impact of such law on its financial
condition or results of operations at this time.
9
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit a holding company system to engage in a
full range of financial activities through a new entity known as a Financial
Holding Company
The law also:
-- Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
-- Provides an enhanced framework for protecting the privacy of consumer
information;
-- Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
-- Modifies the laws governing the implementation of the Community
Reinvestment Act; and
-- Addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
The Corporation and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Corporation and
the Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Corporation and the Bank.
Financial Holding Companies. Bank holding companies that elect to become a
financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or are
incidental or complementary to activities that are financial in nature.
"Financial in nature" activities include:
-- securities underwriting,
-- dealing and market making,
-- sponsoring mutual funds and investment companies,
-- insurance underwriting and agency,
-- merchant banking, and
-- activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines from time to time to be so
closely related to banking or managing or controlling banks as to be a
proper incidents thereto.
Prior to filing a declaration of its election to become a financial holding
company, all of the bank holding company's depository institution subsidiaries
must be well capitalized, well managed, and, except in limited circumstances, in
compliance with the Community Reinvestment Act.
Failure to comply with the financial holding company requirements could lead to
divestiture of subsidiary banks or require all activities of such company to
conform to those permissible for a bank holding company. No Federal Reserve
Board approval is required for a financial holding company to acquire a company
(other than a bank holding company, bank or savings association) engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board:
-- lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities;
10
-- providing any devise or other instrumentality for transferring money
or other financial assets; or
-- arranging, effecting or facilitating financial transactions for the
account of third parties.
A bank holding company that is not also a financial holding company can only
engage in banking and such other activities determined by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
The Corporation is not currently a financial holding company. Management has not
determined at this time whether it will seek an election to become a financial
holding company.
Expanded Bank Activities. The Financial Services Modernization Act also permits
national banks to engage in expanded activities through the formation of
financial subsidiaries. A national bank may have a subsidiary engaged in any
activity authorized for national banks directly or any financial activity,
except for insurance underwriting, insurance investments, real estate investment
or development, or merchant banking, which may only be conducted through a
subsidiary of a financial holding company. Financial activities include all
activities permitted under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized," "well-managed"
and in compliance with the Community Reinvestment Act. The total assets of all
financial subsidiaries may not exceed the lesser of 45% of a bank's total assets
or $50 billion. A national bank must exclude from its assets and equity all
equity investments, including retained earnings, in a financial subsidiary. The
assets of the subsidiary may not be consolidated with the bank's assets. The
bank must also have policies and procedures to assess financial subsidiary risk
and protect the bank from such risks and potential liabilities.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations will require disclosure of
privacy policies to consumers and, in some circumstances, will allow consumers
to prevent disclosure of certain personal information to a nonaffiliated third
party. Pursuant to these rules, effective July 1, 2001, financial institutions
must provide:
-- initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
-- annual notices of their privacy policies to current customers; and
-- a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
These privacy provisions will affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors. It is
not possible at this time to assess the impact of the privacy provisions on the
Corporation's financial condition or results of operations.
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of income to the
Corporation. The Corporation is a legal entity separate and distinct from the
Bank. The Bank is subject to various statutory and regulatory restrictions on
its ability to pay dividends to the Corporation.
11
The FDIC and the Comptroller also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Comptroller's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the Comptroller could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the Comptroller and the Federal Reserve
Board have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank or the
Corporation may pay. An insured depository institution is prohibited from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. See "- Prompt Corrective Action and Other Enforcement
Mechanisms" and "- Capital Standards" for a discussion of these additional
restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Corporation or other affiliates, the purchase of, or investments
in, stock or other securities thereof, the taking of such securities as
collateral for loans, and the purchase of assets of the Corporation or other
affiliates. Such restrictions prevent the Corporation and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Corporation or to or in any other affiliate are
limited, individually, to 10.0% of the Bank's capital and surplus (as defined by
federal regulations), and such secured loans and investments are limited, in the
aggregate, to 20.0% of the Bank's capital and surplus (as defined by federal
regulations). Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal
law. See "Item 1. Business - Supervision and Regulation - Prompt Corrective
Action and Other Enforcement Mechanisms."
Capital Standards
The federal banking agencies have adopted risk-based minimum capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions that are recorded as
off balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items are multiplied
by one of several risk adjustment percentages, which range from 0% for assets
with low credit risk federal banking agencies, to 100% for assets with
relatively high credit risk.
The guidelines require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
At December 31, 2001, the Bank's respective total and Tier 1 risk-based capital
ratios and leverage ratios exceeded the minimum regulatory requirements. See
Note 10 in the audited consolidated financial statements included in the Annual
Report and incorporated herein by reference.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 2001, the
Bank and the Corporation exceeded the required ratios for classification as
"well capitalized."
12
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or any written agreement with the agency.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and to prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
Premiums for Deposit Insurance
Through the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund
("SAIF"), the FDIC insures the deposits of the Bank up to prescribed limits for
each depositor. The amount of FDIC assessments paid by each BIF/SAIF member
institution is based on its relative risk of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate is based on
the institution's capitalization risk category and supervisory subgroup
category. An institution's capitalization risk category is based on the FDIC's
determination of whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. An institution's supervisory
subgroup category is based on the FDIC's assessment of the financial condition
of the institution and the probability that FDIC intervention or other
corrective action will be required.
FDIC-insured depository institutions pay an assessment rate equal to the rate
assessed on deposits insured by the insurance fund.
The assessment rate currently ranges from zero to 27 cents per $100 of domestic
deposits. The FDIC may increase or decrease the assessment rate schedule on a
semi-annual basis. Due to continued growth in deposits and some recent bank
failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits as
mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will be
required to assess premiums on all banks for the first time since 1996. Any
increase in assessments or the assessment rate could have a material adverse
effect on the Corporation's earnings, depending on the amount of the increase.
13
The FDIC is authorized to terminate a depository institution's deposit insurance
upon a finding by the FDIC that the institution's financial condition is unsafe
or unsound or that the institution has engaged in unsafe or unsound practices or
has violated any applicable rule, regulation, order or condition enacted or
imposed by the institution's regulatory agency. The termination of deposit
insurance for the Bank could have a material adverse effect on the Corporation's
earnings, depending on the collective size of the particular institutions
involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. The
FDIC established the FICO assessment rates effective for the fourth quarter of
2001 at approximately $.0184 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the FDIC's insurance funds and do not vary depending on a depository
institution's capitalization or supervisory evaluations.
Proposed Legislation
From time to time, new laws are proposed that could have an effect on the
financial institutions industry. For example, deposit insurance reform
legislation has recently been introduced in the U.S. Senate House of
Representatives that would:
-- Merge the BIF and the SAIF.
-- Increase the current deposit insurance coverage limit for insured
deposits to $130,000 and index future coverage limits to inflation.
-- Increase deposit insurance coverage limits for municipal deposits.
-- Double deposit insurance coverage limits for individual retirement
accounts.
-- Replace the current fixed 1.25 designated reserve ratio with a reserve
range of 1-1.5%, giving the FDIC discretion in determining a level
adequate within this range.
While we cannot predict whether such proposals will eventually become law, they
could have an effect on our operations and the way we conduct business.
Interstate Banking and Branching
The BHCA permits bank holding companies from any state to acquire banks and bank
holding companies located in any other state, subject to certain conditions,
including certain nationwide- and state-imposed concentration limits. The Bank
has the ability, subject to certain restrictions, to acquire by acquisition or
merger branches outside its home state. The establishment of new interstate
branches is also possible in those states with laws that expressly permit it.
Interstate branches are subject to certain laws of the states in which they are
located. Competition may increase further as banks branch across state lines and
enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (CRA) activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities. In December 2000, the federal
banking agencies established annual reporting and public disclosure requirements
for certain written agreements that are entered into between insured depository
institutions or their affiliates and nongovernmental entities or persons that
are made pursuant to, or in connection with, the fulfillment of the CRA.
A bank's compliance with its CRA obligations is based a performance-based
evaluation system that bases CRA ratings on an institution's lending service and
investment performance. When a bank holding company applies for approval to
acquire a bank or another bank holding company, the Federal Reserve Board 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. Based on
an examination conducted March 22, 1999, the Bank was rated satisfactory in
complying with its CRA obligations.
14
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, and NOW accounts) and non-personal time deposits.
At December 31, 2001, the Bank was in compliance with these requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB system. Among other benefits, each FHLB serves
as a reserve or central bank for its members within its assigned region. Each
FHLB is financed primarily from the sale of consolidated obligations of the FHLB
system. Each FHLB makes available loans or advances to its members in compliance
with the policies and procedures established by the Board of Directors of the
individual FHLB. As an FHLB member, the Bank is required to own capital stock in
an FHLB in an amount equal to the greater of:
-- 1% of its aggregate outstanding principal amount of its residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each calendar year; or
-- a certain percentage of its FHLB advances or borrowings.
The Bank's required investment in FHLB stock, based on December 31, 2001
financial data, was approximately $928,000. At December 31, 2001, the Bank had
$928,000 of FHLB stock.
The Gramm-Leach-Bliley Act made significant reforms to the FHLB system,
including:
-- Expanded Membership - (i) expands the uses for, and types of,
collateral for advances; (ii) eliminates bias toward QTL lenders; and
(iii) removes capital limits on advances using real estate related
collateral (e.g., commercial real estate and home equity loans).
-- New Capital Structure - each FHLB is allowed to establish two classes
of stock: Class A is redeemable within six months of notice; and Class
B is redeemable within five years notice. Class B is valued at 1.5
time the value of Class A stock. Each FHLB will be required to
maintain minimum capital equal to 5% of equity. Each FHLB, including
our FHLB of Pittsburgh, submitted capital plans for review and
approval by the Federal Housing Finance Board.
-- Voluntary Membership - federally chartered savings associations, such
as the Bank, are no longer required to be members of the system.
-- REFCorp Payments - changes the amount paid by the system on debt
incurred in connection with the thrift crisis in the late 1980s from a
fixed amount to 20% of net earnings after deducting certain expenses.
At this time it is not possible to predict the impact, if any, such changes or
capital plans will have on our financial condition or results of operation
15
Item 2. Description of Property
(a) Properties. The Corporation owns no real property but utilizes the main
office of the Bank. The Corporation's and the Bank's executive offices are
located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent
or other form of consideration for the use of this facility. The Bank also owns
a facility that houses its data processing operations. The Bank also has ten
retail branch offices located in Venango, Butler, Clarion, Clearfield, Elk, and
Jefferson counties, Pennsylvania. The Bank's total investment in office property
and equipment was $6.5 million with a net book value of $3.4 million at December
31, 2001.
Main Office Eau Claire Office Clarion Office Customer Service &
Technology Center
------------ ------------------ --------------- -------------------
612 Main Street 207 South Washington Street Sixth and Wood Streets
Emlenton, Pennsylvania Eau Claire, Pennsylvania Clarion, Pennsylvania 708 Main Street
Venango County Butler County Clarion County Emlenton, Pennsylvania
Venango County
East Brady Office Bon Aire Office Knox 338 Office Brookville Office
----------------- ------------------ ---------------- -----------------
Broad and Brady Streets 1101 North Main Street Rt. 338 South 263 Main Street
East Brady, Pennsylvania Butler, Pennsylvania Knox, Pennsylvania Brookville, Pennsylvania
Clarion County Butler County Clarion County Jefferson County
Clarion Mall Office Ridgway Office DuBois Office
------------------- ------------------ ---------------
Clarion Mall, Room 400 173 Main Street 861 Beaver Drive
Clarion, Pennsylvania Ridgway, Pennsylvania DuBois, Pennsylvania
Clarion County Elk County Clearfield County
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 9-year lease commencing in 2001 with an option
to renew. The Knox 338 office is located in a supermarket and is operated under
a 10-year lease commencing in 2001 with an option to renew. The Clarion Mall
office is leased for 5 years commencing in 1998 with two (2) options to renew.
The DuBois office is operated under a 5-year lease commencing in 2000, with
three (3) options to renew. The Bank also maintains remote ATM facilities within
its market area.
(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.
16
Item 3. Legal Proceedings
Neither the Bank nor the Corporation is involved in any material legal
proceedings. The Bank, from time to time, is party to litigation that arises in
the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of the Bank. In the opinion of management the resolution of any
such issues would not have a material adverse impact on the financial position,
results of operation, or liquidity of the Bank or the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to stockholders for a vote during the quarter ended
December 31, 2001.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Common Stock Information"
in the Corporation's Annual Report for the fiscal year ended December 31, 2001,
is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The required information is contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report and is incorporated herein by reference.
Item 7. Financial Statements
The Corporation'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
Effective March 21, 2002, the Corporation replaced its independent auditors,
S.R. Snodgrass, A.C. (S.R. Snodgrass) with Crowe, Chizek and Company LLP (Crowe
Chizek). S.R. Snodgrass' report on the Corporation's financial statements during
the two most recent fiscal years preceding the date hereof contained no adverse
opinion or a disclaimer of opinions, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. The decision to change
accountants was approved by the Corporation's Audit Committee. During the last
two fiscal years and the subsequent interim period to the date hereof, there
were no disagreements between the Corporation and S.R. Snodgrass. On any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of S.R. Snodgrass, would have caused it to make a reference to the
subject matter of the disagreement(s) in connection with its reports. None of
the "reportable events" described in Item 304(a)(1)(v) of Regulation S-B
occurred with respect to the Corporation within the last two fiscal years and
the subsequent interim period to the date hereof.
Effective March 21, 2002, the Corporation engaged Crowe Chizek as its
independent auditors for the fiscal year ending December 31, 2002. During the
last two fiscal years and the subsequent interim period to the date hereof, the
Corporation did not consult the Corporation regarding any of the matters or
events set forth in Item 304(a)(2)(v) and (ii) of Regulation S-B.
17
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" is incorporated by reference to the
Corporation's definitive proxy statement for the Corporation's Annual Meeting of
Stockholders to be held on May 21, 2002 (the Proxy Statement) which will be
filed no later than 120 days following the Corporation's fiscal year end.
Item 10. Executive Compensation
The information contained under the section captioned "Information as to
Nominees, Directors and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Principal Beneficial
Owners of the Corporation's Common Stock" in the Proxy
Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, 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.
18
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 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, 2001.
21 Subsidiaries of the Registrant (see information
contained herein under "Business - Subsidiary
Activity").
99.1 Emclaire Financial Corp. Dividend Reinvestment and
Stock Purchase Plan.
(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.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP.
Dated: March 25, 2002 By: /s/ David L. Cox
-----------------------------------------------------
David L. Cox
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ David L. Cox By: /s/ William C. Marsh
----------------------------------------------- ------------------------------------------------
David L. Cox William C. Marsh
President, Chief Executive Officer, and Director Secretary/Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 25, 2002 Date: March 25, 2002
By: /s/ Ronald L. Ashbaugh By: /s/ Brian C. McCarrier
----------------------------------------------- ------------------------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 25, 2002 Date: March 25, 2002
By: /s/ Bernadette H. Crooks By: /s/ George W. Freeman
----------------------------------------------- ------------------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: March 25, 2002 Date: March 25, 2002
By: /s/ Rodney C. Heeter By: /s/ Robert L. Hunter
----------------------------------------------- ------------------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: March 25, 2002 Date: March 25, 2002
By: /s/ J. Michael King By: /s/ John B. Mason
----------------------------------------------- ------------------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 25, 2002 Date: March 25, 2002
By: Elizabeth C. Smith
-----------------------------------------------
Elizabeth C. Smith
Director
Date: March 25, 2002
20