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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 EXCHANGE ACT OF
1934
For the fiscal year ended: December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 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 incorporation or organization) (I.R.S. Employer
Identification No.)
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
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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 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 [ ].
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. $15,994,000
As of February 29, 2004, there were issued and outstanding 1,267,835
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 10, 2004, was $28,111,439 ($26.50 per share
average bid and ask prices of $25.75 and $26.50, respectively, based on
1,267,835 shares of Common Stock outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 2003 (Parts I, II, and IV).
2. Portions of the Proxy Statement for the May 19, 2004 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
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Item 1. Description of Business...................................................................................1
Item 2. Description of Properties................................................................................15
Item 3. Legal Proceedings........................................................................................16
Item 4. Submission of Matters to a Vote of Security Holders......................................................16
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters.................................................16
Item 6. Management's Discussion and Analysis or Plan of Operation................................................16
Item 7. Financial Statements.....................................................................................16
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................16
Item 8A. Controls and Procedures..................................................................................17
PART III
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Item 9. Directors and Executive Officers of the Registrant.......................................................17
Item 10. Executive Compensation...................................................................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........17
Item 12. Certain Relationships and Related Transactions...........................................................17
Item 13. Exhibits, Lists and Reports on Form 8-K..................................................................18
Item 14. Principal Accountant Fees and Services...................................................................19
Signatures .........................................................................................................20
PART I
Item 1. Description of Business
--------------------------------
Forward Looking Statements
Discussions of certain matters in this Form 10-KSB and other related year end
documents may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such,
may involve risks and uncertainties. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies, and expectations,
are generally identifiable by the use of words or phrases such as "believe",
"plan", "expect", "intend", "anticipate", "estimate", "project", "forecast",
"may increase", "may fluctuate", "may improve" and similar expressions of future
or conditional verbs such as "will", "should", "would", and "could". These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Corporation operates, projections of future
performance, potential future credit experience, perceived opportunities in the
market and statements regarding the Corporation's mission and vision. The
Corporation's actual results, performance and achievements may differ materially
from the results, performance, and achievements expressed or implied in such
forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, the local economy, the demand for the Corporation's products and
services, accounting principles or guidelines, legislative and regulatory
changes, monetary and fiscal policies of the U.S. Government, U.S. Treasury, and
Federal Reserve, real estate markets, competition in the financial services
industry, attracting and retaining key personnel, performance of new employees,
regulatory actions, changes in and utilization of new technologies and other
risks detailed in the Corporation's reports filed with the Securities and
Exchange Commission (SEC) from time to time. These factors and those discussed
under "Risk Factors" should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. The
Corporation does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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, 2003, the Corporation had $262.5 million in total assets, $22.7
million in stockholders' equity, $190.5 million in loans and $217.1 million in
deposits.
1
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
in market conditions and circumstances where this is advantageous in managing
interest rate risk.
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 37.3% of the total loan portfolio at December 31, 2003. 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.
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, 2003, the Bank's loans to one borrower limit based upon 15% of
unimpaired capital was $3.0 million. At December 31, 2003, the Bank's largest
single lending relationship had an outstanding balance of $5.0 million, which
consisted of a loan to a municipality and was not subject to the legal lending
limit. The next largest aggregate borrower had loans which totaled $2.6 million
and consisted of loans secured by commercial real estate and business property
in the Bank's lending area, and was performing in accordance with its terms.
Loan Portfolio. 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) 2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Consumer $106,712 55.5% $101,585 59.4% $100,420 62.0% $92,429 60.9% $90,232 64.7%
Commercial 44,935 23.4% 34,986 20.4% 26,470 16.3% 24,661 16.2% 20,360 14.5%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 151,647 78.9% 136,571 79.8% 126,890 78.3% 117,090 77.1% 110,592 79.2%
Other loans:
Commercial business 26,470 13.9% 21,913 12.8% 20,806 12.9% 20,084 13.3% 14,660 10.6%
Consumer 14,142 7.4% 12,660 7.4% 14,308 8.8% 14,618 9.6% 14,210 10.2%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total other loans 40,612 21.1% 34,573 20.2% 35,114 21.7% 34,702 22.9% 28,870 20.8%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans receivable 192,259 100.0% 171,144 100.0% 162,004 100.0% 151,792 100.0% 139,462 100.0%
====== ====== ====== ====== ======
Less:
Allowance for loan losses 1,777 1,587 1,464 1,460 1,373
--------- --------- --------- --------- ---------
Net loans receivable $190,482 $169,557 $160,540 $150,332 $138,089
========= ========= ========= ========= =========
2
The following table sets forth the scheduled contractual principal repayments or
interest repricing of loans in the Corporation's portfolio as of December 31,
2003. Demand loans having no stated schedule of repayment and no stated maturity
are reported as due within one year.
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(Dollar amounts in thousands) Due in one Due from one Due from five Due after
year or less to five to ten ten years Total
years years
------------------------------------------------------------------------------------------------------
Consumer mortgage $7,603 $20,493 $25,008 $53,608 $106,712
Commercial mortgage 4,292 18,395 17,378 4,870 44,935
Commercial business 10,356 7,917 2,011 6,186 26,470
Consumer 6,802 6,072 1,240 28 14,142
------------ ------------ ----------- ------------ ------------
$29,053 $52,877 $45,637 $64,692 $192,259
============ ============ =========== ============ ============
The following table sets forth the dollar amount of the Corporation's fixed- and
adjustable-rate loans with maturities greater than one year as of December 31,
2003:
Loans Maturing Over One Year
----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Fixed Adjustable
rates rates
----------------------------------------------------------------------------------------------------
Consumer mortgage $98,081 $1,028
Commercial mortgage 11,747 28,896
Commercial business 12,796 3,318
Consumer 7,340 -
------------ ------------
$129,964 $33,242
============ ============
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.
3
As of December 31, 2003, the Corporation's non-performing assets, which include
non-accrual loans, loans delinquent due to maturity, troubled debt
restructuring, repossessions and REO, amounted to $1.4 million or 0.52% 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
immediately.
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, 2003, the
Corporation's classified and criticized assets amounted to $8.4 million with
$4.1 million classified as substandard and $4.3 million identified as special
mention.
The following table sets forth information regarding the Corporation's
non-performing assets as of December 31:
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------
Non-performing loans $1,329 $1,160 $1,245 $900 $703
Total as a percentage of gross loans 0.69% 0.69% 0.78% 0.59% 0.50%
---------- ---------- ---------- ---------- ----------
Repossessions 45 - - - -
Real estate acquired through foreclosure - 3 20 33 104
---------- ---------- ---------- ---------- ----------
Total as a percentage of total assets 0.02% 0.00% 0.01% 0.02% 0.05%
---------- ---------- ---------- ---------- ----------
Total non-performing assets $1,374 $1,163 $1,265 $933 $807
========== ========== ========== ========== ==========
Total non-performing assets
as a percentage of total assets 0.52% 0.49% 0.58% 0.48% 0.42%
========== ========== ========== ========== ==========
Allowance for loan losses as a
percentage of non-performing loans 133.71% 136.81% 117.59% 162.22% 195.31%
========== ========== ========== ========== ==========
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 each month for valuation purposes and 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, 2003 of $1.8 million is adequate to cover probable losses
inherent in the portfolio.
4
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) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------
Balance at beginning of period $1,587 $1,464 $1,460 $1,373 $1,336
Provision for loan losses 330 381 154 209 162
Charge-offs:
Mortgage loans (25) (36) (27) (34) (12)
Commercial business loans (26) (186) (62) (1) -
Consumer loans (154) (109) (108) (121) (143)
--------- --------- --------- --------- ---------
(205) (331) (197) (156) (155)
Recoveries:
Mortgage loans - 26 - - -
Commercial business loans 22 20 - 2 -
Consumer loans 43 27 47 32 30
--------- --------- --------- --------- ---------
65 73 47 34 30
Balance at end of period $1,777 $1,587 $1,464 $1,460 $1,373
========= ========= ========= ========= =========
Ratio of net charge-offs to average loans
outstanding 0.08% 0.15% 0.10% 0.08% 0.09%
========= ========= ========= ========= =========
Ratio of allowance to total loans at end of
period 0.92% 0.93% 0.90% 0.96% 0.98%
========= ========= ========= ========= =========
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, 2003 approximately $14.7 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 stockholders' equity.
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, 2003:
(Dollar amounts in Due in 1 Due from 1 Due from 3 Due from Due after No scheduled
thousands) 5
year or to 3 to 5 years to 10 10 years maturity Total
less years years
-----------------------------------------------------------------------------------------------------------
U.S. Government
securities $3,065 $3,494 $9,365 $2,971 $- $- $18,895
Mortgage-backed
securities - - 832 837 17 - 1,686
Municipal securities - - - - 15,491 - 15,491
Corporate securities 3,541 6,330 - - - - 9,871
Equity securities - - - - - 3,219 3,219
---------- --------- ------------- ---------- ---------- ---------- ----------
Estimated Fair Value $6,606 $9,824 $10,197 $3,808 $15,508 $3,219 $49,162
========== ========= ============= ========== ========== ========== ==========
Weighted average yield
(1) 5.92% 3.60% 2.85% 4.04% 7.11% 4.67% 4.19%
========== ========= ============= ========== ========== ========== ==========
(1) Weighted average yield is calculated based upon amortized cost.
5
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 the FHLB. In addition, the Bank
can obtain advances from the FRB discount window. For a description of the
Bank's sources of funds, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report incorporated herein by
reference.
Deposits. The Bank offers a wide variety of retail deposit account products to
both consumer and commercial deposit customers, including time deposits,
non-interest bearing and interest bearing demand deposit accounts, savings
deposits and money market accounts.
Deposit products are promoted in periodic newspaper and radio advertisements,
along with notices provided in customer account statements. The Bank's market
strategy is based on its reputation as a community bank that provides quality
products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. 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 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, 2003, the Bank had no subsidiaries.
Personnel
At December 31, 2003, the Bank had 98 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 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.
6
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.
Interest Rates. By nature, all financial institutions are impacted by changing
interest rates, due to the impact of such upon:
|X| the demand for new loans
|X| prepayment speeds experienced on various asset classes, particularly
residential mortgage loans
|X| credit profiles of existing borrowers |X| rates received on loans and
securities
|X| 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.
7
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.
Supervision and Regulation
General. 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.
The Corporation. The Corporation is a registered bank holding company, and
subject to regulation and examination by the FRB under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). The Corporation is required to file with
the FRB periodic reports and such additional information as the FRB may require.
The FRB may require the Corporation to terminate an activity or terminate
control of or liquidate or divest certain subsidiaries, affiliates or
investments when the FRB believes the activity or the control of the subsidiary
or affiliate constitutes a significant risk to the financial safety, soundness
or stability of any of its banking subsidiaries. The FRB also has the authority
to regulate provisions of certain bank holding company debt, including the
authority to impose interest ceilings and reserve requirements on such debt.
Under certain circumstances, the Corporation must file written notice and obtain
FRB approval prior to purchasing or redeeming its equity securities.
Further, the Corporation is required by the FRB to maintain certain levels
of capital. See "Capital Standards."
The Corporation is required to obtain prior FRB approval 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 FRB
approval is also required for the merger or consolidation of the Corporation and
another bank holding company.
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, subject to the prior FRB approval, The
Corporation may engage in any, or acquire shares of companies engaged in,
activities that the FRB deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under FRB regulations, the Corporation is required to serve as a source of
financial and managerial strength to the Corporation's subsidiary bank and may
not conduct operations in an unsafe or unsound manner. In addition, it is the
FRB'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 FRB to be an unsafe and unsound banking practice
or a violation of FRB regulations or both.
The Corporation is also a bank holding company within the meaning of the
Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are
subject to examination by, and may be required to file reports with, the
Pennsylvania Department of Banking.
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, corporate governance, and other requirements and
restrictions of the Exchange Act.
8
The Bank. As a national banking association, the Bank is subject to primary
supervision, examination and regulation by the Office of the Comptroller of the
Currency (the "OCC"). The Corporation is also subject to regulations of the
Federal Deposit Insurance Corporation ("FDIC") as administrator of the Bank
Insurance Fund ("BIF") and the FRB. If, as a result of an examination of the
Bank, the OCC should determine that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity or other aspects of the
Corporation's operations are unsatisfactory or that the Bank is violating or has
violated any law or regulation, various remedies are available to the OCC. Such
remedies include the power to enjoin "unsafe or unsound practices," to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict the Bank's growth, to assess civil
monetary penalties, and to remove officers and directors. The FDIC has similar
enforcement authority, in addition to its authority to terminate the Bank's
deposit insurance in the absence of action by the OCC and upon a finding that
the Bank is operating in an unsafe or unsound condition, is engaging in unsafe
or unsound activities, or that the Corporation's conduct poses a risk to the
deposit insurance fund or may prejudice the interest of its depositors.
A national bank may have a financial subsidiary engaged in any activity
authorized for national banks directly or certain permissible activities.
Generally, a financial subsidiary is permitted to engage in activities that are
"financial in nature" or incidental thereto, even though they are not
permissible for the national bank itself. The definition of "financial in
nature" includes, among other items, underwriting, dealing in or making a market
in securities, including, for example, distributing shares of mutual funds. The
subsidiary may not, however, engage as principal in underwriting insurance,
issue annuities or engage in real estate development or investment or merchant
banking.
The Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law
The Sarbanes-Oxley Act of 2002. This new legislation addresses accounting
oversight and corporate governance matters, including:
o the creation of a five-member oversight board appointed by the
Securities & Exchange Commission that will set standards for
accountants and have investigative and disciplinary powers;
o the prohibition of accounting firms from providing various types
of consulting services to public clients and requiring accounting
firms to rotate partners among public client assignments every
five years;
o increased penalties for financial crimes;
o expanded disclosure of corporate operations and internal controls
and required executive certification of financial presentations;
o increased requirements for board audit committees and their
members;
o enhanced controls on, and reporting of, insider trading; and
o statutory separations between investment bankers and analysts.
The new legislation and its implementing regulations will result in increased
costs of compliance, including certain outside professional costs.
USA Patriot Act of 2001. The USA Patriot Act of 2001 and its implementing
regulations significantly expanded the anti-money laundering and financial
transparency laws, including:
o due diligence requirements for financial institutions that
administer, maintain, or manage private bank accounts or
correspondent accounts for non-US persons;
o standards for verifying customer identification at account
opening and maintaining expanded records;
o rules to promote cooperation among financial institutions,
regulators, and law enforcement entities in identifying parties
that may be involved in terrorism or money laundering;
9
o reports by non-financial businesses filed with the U.S. Treasury
Department for cash transactions exceeding $10,000; and
o suspicious activities reports securities by brokers and dealers
if they believe a customer may be violating U.S. laws and
regulations.
Fair and Accurate Credit Transactions Act. In December 2003, President Bush
signed into law the Fair and Accurate Credit Transactions Act ("FACT Act") which
sets new obligations for financial firms to help deter identity theft and give
consumers more control of their credit data. It also reauthorizes a federal ban
on state laws that interfere with corporate credit granting and marketing
practices. The FRB and the Federal Trade Commission ("FTC") are required to
draft regulations to implement the FACT Act. It is not possible at this time to
determine the impact of such regulations that are to be drafted; however, the
FRB and FTC recently announced that businesses will have until December 1, 2004
to comply with the new initiatives.
Privacy. Federal banking rules limit the ability of banks and other financial
institutions to disclose non-public information about consumers to nonaffiliated
third parties. Pursuant to these rules, financial institutions must provide:
o 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;
o annual notices of their privacy policies to current customers;
and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
These privacy provisions affect how consumer information is transmitted through
diversified financial companies and conveyed to outside vendors. The
Corporation's privacy policies have been implemented in accordance with the law.
On December 22, 2003, the SEC issued the advance notice of proposed rulemaking
along with the federal banking agencies and other government agencies seeking
comment on whether they should consider amending current regulations "to allow
or require financial institutions to provide alternative types of privacy
notices, such as a short privacy notice, that would be easier for consumers to
understand." The concept release lists more than 40 questions regarding which
the agencies seek comment from the public, organized in the following
categories: goals of a privacy notice, elements of a privacy notice, language of
a privacy notice, format of a privacy notice, mandatory and permissible aspects
of a privacy notice, costs and benefits of a short notice, and other categories.
Interagency Guidance on Response Programs to Protect Against Identity Theft. On
August 12, 2003, the Federal bank and thrift regulatory agencies requested
public comment on proposed guidance that would require financial institutions to
develop programs to respond to incidents of unauthorized access to customer
information, including procedures for notifying customers under certain
circumstances. The proposed guidance:
o interprets previously issued interagency customer information
security guidelines that require financial institutions to
implement information security programs designed to protect their
customers' information; and
o describes the components of a response program and sets a
standard for providing notice to customers affected by
unauthorized access to or use of customer information that could
result in substantial harm or inconvenience to those customers,
thereby reducing the risk of losses due to fraud or identity
theft.
The Bank is not able at this time to determine the impact of any such proposed
guidance on the Corporation's financial condition or results of operation.
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.
In addition, the Bank's regulators have 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.
10
Transactions with Affiliates. 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, any 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 any affiliates. Such
restrictions prevent any 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 any 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. Some of the entities
included in the definition of an affiliate are parent companies, sister banks,
sponsored and advised companies, investment companies whereby the Bank or its
affiliate serves as investment advisor, and financial subsidiaries of the bank.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions of federal law. See "Prompt
Corrective Action and Other Enforcement Mechanisms."
Loans-to-One Borrower Limitations. With certain limited exceptions, the maximum
amount that a national bank may lend to any borrower (including certain related
entities of the borrower) at one time may not exceed 15% of the unimpaired
capital and surplus of the institution, plus an additional 10% of unimpaired
capital and surplus for loans fully secured by readily marketable collateral. At
December 31, 2003, the Bank's loans-to-one-borrower limit was $3.0 million based
upon the 15% of unimpaired capital and surplus measurement. At December 31,
2003, the Bank's largest single lending relationship had an outstanding balance
of $5.0 million, which consisted of a loan to a municipality and was not subject
to the legal lending limit. The next largest aggregate borrower had loans which
totaled $2.6 million and consisted of loans secured by commercial real estate
and business property in the Bank's lending area, and was performing in
accordance with its terms.
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 which are
recorded as off-balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as federal banking agencies, to 100% for
assets with relatively high credit risk.
The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher
levels of capital being required for those categories perceived as representing
greater risk. Under the capital guidelines, a banking organization's total
capital is divided into tiers. "Tier I capital" consists of (1) common equity,
(2) qualifying noncumulative perpetual preferred stock, (3) a limited amount of
qualifying cumulative perpetual preferred stock and (4) minority interests in
the equity accounts of consolidated subsidiaries (including trust-preferred
securities), less goodwill and certain other intangible assets. Not more than
25% of qualifying Tier I capital may consist of trust-preferred securities.
"Tier II capital" consists of hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
preferred stock that does not qualify as Tier I capital, a limited amount of the
allowance for loan and lease losses and a limited amount of unrealized holding
gains on equity securities. "Tier III capital" consists of qualifying unsecured
subordinated debt. The sum of Tier II and Tier III capital may not exceed the
amount of Tier I capital.
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.
11
In addition, federal banking regulators may set capital requirements higher than
the minimums described above for financial institutions whose circumstances
warrant it. For example, a financial institution experiencing or anticipating
significant growth may be expected to maintain capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets.
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, 2003, the Bank exceeded the required ratios
for classification as "well/adequately capitalized."
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.
Finally, pursuant to an interagency agreement, the FDIC can examine any
institution that has a substandard regulatory examination score or is considered
undercapitalized - without the express permission of the institution's primary
regulator.
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 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 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.
12
Premiums for Deposit Insurance. Through the BIF, the FDIC insures the Bank's
customer deposits up to prescribed limits for each depositor. The amount of FDIC
assessments paid by each BIF 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 Savings Association Insurance Fund ("SAIF").
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. 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. Furthermore, the FDIC is
authorized to raise insurance premiums under certain circumstances.
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
FICO assessment rates for fourth quarter of fiscal 2003 were 1.54 cents for each
$100 of 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.
Interstate Banking and Branching. Banks have the ability, subject to certain
State 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 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. Furthermore, financial institutions are subject to annual reporting
and public disclosure requirements for certain written agreements that are
entered into between insured depository institutions or their affiliates and
non-governmental entities or persons that are made pursuant to, or in connection
with, the fulfillment of the CRA.
On February 6, 2004, the federal banking agencies proposed amendments to the CRA
regulations that would:
13
o increase the definition of "small institution" from total assets
of $250 million to $500 million, without regard to any holding
company; and
o take into account abusive lending practices by a bank or its
affiliates in determining a bank's CRA rating.
A bank's compliance with its CRA obligations is based on a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank applies for approval to acquire another
bank, the banking regulators 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. The Bank's most recent CRA exam on March 22, 1999
resulted in a rating of satisfactory.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan
Bank of Pittsburgh. 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, similar to current requirements, would be
required to own capital stock in the FHLB in an amount equal to a percentage of
our loans and borrowings. The new capital stock is redeemable on five years'
written notice, subject to certain conditions.
The Corporation does not believe that the initial implementation of the
FHLB-Pittsburgh new capital plan as approved will have a material impact upon
its financial condition, cash flows, or results of operations. However, the Bank
could be required to purchase or sell capital stock at the discretion of the
FHLB-Pittsburgh.
Federal Reserve System. The FRB requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW, and Super NOW checking accounts) and
non-personal time deposits. At December 31, 2003, the Bank was in compliance
with these requirements.
14
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 following table
sets forth information with respect to the Bank's offices at December 31, 2003:
(Dollar amounts in thousands) Owned Lease Net Book Deposits
or Expiration Value or at
Location County Leased Date (1) Annual Rent 12/31/2003
------------------------------------------------------------------------------------------------------------------
Corporate and Bank Main Offices:
--------------------------------------------------
.. Headquarters and Main Office Venango Owned -- $1,533 $45,118
612 Main Street, Emlenton, Pennsylvania 16373
Data Center Venango Owned -- 935 --
708 Main Street, Emlenton, Pennsylvania 16373
Bank Branch Offices
--------------------------------------------------
Bon Aire Office Butler Leased May 2011 35 30,424
1101 North Main Street, Butler, Pennsylvania
16003
Brookville Office Jefferson Owned -- 226 19,967
263 Main Street, Brookville, Pennsylvania 15825
Clarion Wood Street Office Clarion Owned -- 355 35,948
Sixth & Wood Street, Clarion, Pennsylvania
16214
Clarion Mall Office (2) Clarion Leased March 2003 17 -
Room 400, Clarion Mall, Clarion, Pennsylvania
16214
DuBois Office Clearfield Leased June 2005 20 13,449
861 Beaver Drive, Dubois, Pennsylvania 15801
East Brady Office Clarion Owned -- 52 17,026
323 Kelly's Way, East Brady, Pennsylvania 16028
Eau Claire Office Butler Owned -- 152 12,994
207 Washington Street, Eau Claire, Pennsylvania
16030
Knox Office Clarion Leased December
2011 25 25,876
Route 338 South, Knox, Pennsylvania 16232
Meridian Office Butler Leased December
2012 26 4,079
101 Meridian Road, Butler, Pennsylvania 16003
Ridgway Office Elk Owned -- 150 12,229
173 Main Street, Ridgway, Pennsylvania 15853
-----------------
$217,110
=================
------------------------------------------------------------------------------------------------------------------
(1) Lease agreements for leased offices typically include renewal options.
(2) The Clarion Mall office was closed at the expiration of its lease in the
first quarter 2003 and operations were consolidated with the Clarion Wood
Street Office.
The Bank also maintains remote ATM facilities within its market area.
(b) Investment Policies. See "Item 1. Description of 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.
Description of Business - Lending Activities," "Item 1. Description of
Business - Supervision and Regulation of the Bank," and "Item 2.
Description of Property - (a) Properties" above.
15
(2) Investments in Real Estate Mortgages. See "Item 1. Description of
Business - Lending Activities" and "Item 1. Description of Business -
Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Description of Business - Lending
Activities," "Item 1. Description of Business - Supervision and Regulation
of the Bank," and "Item 1. Description of Business - Subsidiary Activity."
(c) Description of Real Estate and Operating Data. Not Applicable.
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, 2003.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
----------------------------------------------------------------------------
The information is contained under the section captioned "Common Stock
Information" in the Corporation's Annual Report for the fiscal year ended
December 31, 2003, and is incorporated herein by reference. For information with
respect to equity compensation plans, see "Item 11 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters."
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
Corporation's Annual Report for the year ended December 31, 2003 and is
incorporated herein by reference.
Item 7. Financial Statements
------------------------------
The Corporation's consolidated financial statements required herein are
contained in the Corporation's Annual Report for the year ended December 31,
2003and 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 LLC (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 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.
16
During the two fiscal years and the subsequent interim period prior to March 21,
2002, the Corporation did not consult Crowe Chizek regarding any of the matters
or events set forth in Item 304(a)(2)(v) and (ii) of Regulation S-B.
Item 8A. Controls And Procedures.
----------------------------------
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Corporation's reports
in compliance with the Securities Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms,
and that such information is accumulated and communicated to the Corporation's
Management, including its Chief Executive Officer and Principal Financial and
Accounting Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c) promulgated under the Exchange Act. As of December
31, 2003, the Corporation carried out an evaluation, under the supervision and
with the participation of the Corporation's Management, including the
Corporation's Chief Executive Officer and the Corporation's Principal Financial
and Accounting Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures. Based on the foregoing, the
Corporation's Chief Executive Officer and Principal Financial and Accounting
Officer concluded that the Corporation's disclosure controls and procedures were
effective.
During the fourth quarter of fiscal year 2003, there were no significant changes
in the Corporation's internal control over financial reporting or in other
factors that could significantly affect the internal controls subsequent to the
date of the evaluation referenced above.
PART III
Item 9. Directors and Executive Officers of the Registrant
-----------------------------------------------------------
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 19, 2004 (the Proxy Statement) which will be
filed no later than 120 days following the Corporation's fiscal year end.
The Corporation maintains a Code of Personal and Business Conduct and Ethics
(the "Code") that applies to all employees, including the CEO and the principal
financial and accounting officer. A copy of the Code is included as Exhibit 14
hereto. Any waiver of the Code with respect to the CEO and the principal
financial and accounting officer will be publicly disclosed in accordance with
applicable regulations.
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 and
Related Stockholder Matters
----------------------------------------------------------------------------
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.
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.
17
Item 13. Exhibits, Lists 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. (1)
3.2 Bylaws of Emclaire Financial Corp. (1)
4 Specimen Stock Certificate of Emclaire Financial Corp. (2)
10.1 Form of Change in Control Agreement between Registrant and two
executive officers. (3)
10.2 Form of Group Term Carve-Out Plan between the Farmers National
Bank of Emlenton and 20 Officers and Employees. (5)
10.3 Form of Supplemental Executive Retirement Plan Agreement between
the Farmers National Bank of Emlenton and Six Officers. (5)
11 Statement regarding computation of earnings per share (see Note 1
of the Notes to Consolidated Financial Statements in the Annual
Report).
13 Annual Report to Stockholders for the fiscal year ended December
31, 2003.
14 Code of Personal and Business Conduct and Ethics
31.1 CEO 302 Certification.
31.2 Principal Financial and Accounting Officer 302 Certification.
32.1 Chief Executive Officer 906 Certification.
32.2 Principal Financial and Accounting Officer 906 Certification.
20 Emclaire Financial Corp. Dividend Reinvestment and Stock Purchase
Plan.(4)
21 Subsidiaries of the Registrant (see information contained herein
under "Item 1. Description of Business - Subsidiary Activity").
(b) Reports on Form 8-K.
On October 17, 2003, the Corporation filed Form 8-K announcing earnings
for the third quarter of fiscal year 2003.
--------------------------------------------------------------------------------
(1) 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.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2001.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2002.
18
Item 14. Principal Accountant Fees and Services.
------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Ratification of Independent Public Accountants" in the Proxy
Statement.
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 29, 2004 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/ Shelly L. Rhoades
----------------------------------------------- ------------------------------------------------
David L. Cox Shelly L. Rhoades
President, Chief Executive Officer, and Director Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 29, 2004 Date: March 29, 2004
By: /s/ Ronald L. Ashbaugh By: /s/ Brian C. McCarrier
----------------------------------------------- ------------------------------------------------
Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 29, 2004 Date: March 29, 2004
By: /s/ Bernadette H. Crooks By: /s/ George W. Freeman
----------------------------------------------- ------------------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: March 29, 2004 Date: March 29, 2004
By: /s/ Rodney C. Heeter By: /s/ Robert L. Hunter
----------------------------------------------- ------------------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: March 29, 2004 Date: March 29, 2004
By: /s/ J. Michael King By: /s/ John B. Mason
----------------------------------------------- ------------------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 29, 2004 Date: March 29, 2004
20