First Community Financial Corporation
(the “Corporation”) is a one bank holding company incorporated under the laws of the Commonwealth of Pennsylvania and registered under the Bank Holding Company Act of 1956, as amended. The Corporation is headquartered in Mifflintown,
Pennsylvania and was organized on November 13, 1984 for the purpose of acquiring The First National Bank of Mifflintown (the “Bank”) as a wholly-owned national bank subsidiary. The Corporation’s principal activity consists of
owning and supervising the Bank, which is engaged in providing banking and banking related services in central Pennsylvania, principally in Juniata and Perry Counties. The day-to-day management of the Bank is conducted by its officers, subject to
review by its Board of Directors. Each Director of the Corporation also is a Director of the Bank. The Corporation derives substantially all of its current income from the Bank. The Corporation also has made certain investments in other Pennsylvania
banking institutions, the dividends on which also are included in our current income.
The First National Bank of Mifflintown
The Bank became a wholly-owned subsidiary of the Corporation pursuant to a Plan of Reorganization and Merger consummated in April 1985. The Bank was
originally chartered as a private bank in 1864 and converted to a national bank in 1889. The Bank conducts business through eleven full service banking offices. The main banking office is located in the Borough of Mifflintown, four branch offices
are maintained in Juniata County and six branch offices are maintained in Perry County, Pennsylvania.
As of December 31, 2007, the
Bank had total assets of $302.3 Million, total shareholders’ equity of $21.5 Million, and total deposits of $245.0 Million.
The
deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the extent provided by law. The Bank provides a wide range of banking services to businesses and individuals, with particular emphasis on serving
the needs of the individual consumer. Banking services include secured and unsecured financing, real estate financing, agricultural financing, mortgage lending, and trust and other related services, as well as checking, savings and time deposits,
and a wide variety of other financial services to individuals, businesses, municipalities and governmental bodies
The Bank concentrates
its lending activities on residential real estate, commercial real estate, commercial loans, agricultural loans and consumer installment loans. A substantial portion of the loan portfolio is secured by commercial and residential real estate, either
as primary or secondary collateral. Loan approvals are made in accordance with a policy that includes delegated authorities approved by the Board of Directors. Loans are approved at various management levels up to and including the Board of
Directors, depending on the amount of the loan.
1
As of December 31, 2007, residential real estate loans represented 67.2% of the total loan
portfolio. These types of loans represent a relatively low level of risk, especially in the absence of speculative lending. The most prominent risks in this market are those associated with declining economic conditions resulting from economic
downturns and increases in unemployment, which could affect borrowers’ abilities to repay loans. The Bank limits its risk in this area by requiring private mortgage insurance for certain residential real estate loans in excess of 80% of the
appraised value.
Commercial real estate loans represented 19.9%, commercial, financial, agricultural loans represented 9.1%, and
construction loans represented 0.75% of the total loan portfolio at December 31, 2007. Commercial real estate loans consist primarily of loans to local businesses where the collateral for the loans includes the real estate occupied by the
business. Commercial loans are comprised of loans to small businesses whose demand for funds fall within the legal lending limits of the Bank. The Bank’s agricultural loans generally consist of operating lines used to finance farming operations
through the growing season and term loans to finance farm equipment purchases. Risks associated with these types of loans can be significant and include, but are not limited to, fraud, bankruptcy, economic downturn, deteriorated or non-existing
collateral and changes in interest rates. The Bank controls risk by using certified appraisers in determining property values, by performing thorough credit analysis and by limiting the Bank’s total exposure to these types of loans.
Additionally, the Bank generally does not lend above 80% of the collateral value and does not have significant loan concentrations within any one business or industry.
As of December 31, 2007, consumer installment loans represented 3.1% of the total loan portfolio and are made on a secured and unsecured basis, primarily to fund personal, family and household purposes, including
loans for automobiles, home improvement, education loans and investments. Risks associated with consumer installment loans include, but are not limited to, fraud, deteriorated or non-existing collateral, general economic downturn and customer
financial problems. Risk in this area is limited by analyzing creditworthiness and controlling debt to income limits.
The Bank’s
Trust Department provides a broad range of personal and corporate trust services. It administers and provides investment management services for estates, trusts, agency accounts and employee benefit plans. For the year ended December 31, 2007,
income from the Bank’s fiduciary activities amounted to $382,000 and the Bank had assets worth $82.9 million under management in its Trust Department at that time.
The Bank is subject to regulation and periodic examination by the Office of the Comptroller of the Currency (the “OCC”).
During the last five years, the Corporation has experienced substantial growth. Specifically, the Corporation’s total assets increased from $201.8 million as of December 31, 2002 to $302.3 million as of
December 31, 2007, funded primarily by an increase in the Bank’s total deposits over this period from $174.1 million to $245.0 million. Additionally, the Bank’s loans increased from $125.6 million to $191.2 million over this same
period, while the Corporation’s annual net income ranged between $2.0 million and $2.1 million.
2
The growth in the Bank’s deposits and loans reflect its efforts to increase its market share in
Juniata and Perry Counties and is largely attributable to the maturation of the Bank’s newer branches in East Waterford, Juniata County and Loysville, New Bloomfield, Shermans Dale, and Bloomfield Borough, Perry County.
Market Area and Competition
The Bank’s
market area lies within Juniata and Perry Counties, Pennsylvania. By all indications, this region has good economic prospects. Juniata and Perry Counties had a combined population of approximately 68,000 in 2003, representing an increase from 2000
of 1.5% for Juniata County and 3.9% for Perry County. The primary industries in the region are agriculture and timber/woodworking. Unemployment rates in 2006 of 4.4% in Juniata County and 4.0% in Perry County reflect a relatively stable workforce.
With a stable workforce and growing population, the Corporation believes that the region’s economic prospects are positive.
As of
June 30, 2007, three commercial banks (the Bank, Juniata Valley Bank, and Omega Bank, N.A.) operated offices in Juniata County. Of all financial institutions operating in Juniata County, Juniata Valley Bank ranked first in terms of total
deposits at June 30, 2007 with 45.42%. The Bank followed closely with 44.45% and Omega Bank, N.A. ranked third with 10.13%. Each of the institutions with which the Bank competes in Juniata County is substantially larger than the Bank. With the
advantages of larger asset and capital bases, these competitors tend to have larger lending limits and tend to offer a wider variety of services than does the Bank.
In Perry County, the Bank faces competition from six banks. Several of these competitors also are substantially larger than the Bank and are likely to enjoy the competitive advantages provided by larger asset and
capital bases. Moreover, the Perry County market is less concentrated, and therefore more competitive, than the Juniata County market. The Bank’s principal competitors in Perry County are Bank of Landisburg, with 30.98% of deposits at
June 30, 2007, Orrstown Bank, with approximately 20.77%, and First National Bank of Marysville with approximately 13.89%. The Bank has 14.16% of the deposits in Perry County as of June 30, 2007.
The Bank also competes with other types of financial institutions, including credit unions, finance companies, brokerage firms, insurance companies and
retailers. Deposit deregulation has intensified the competition for deposits in recent years.
Supervision and Regulation
As a bank holding company, the Corporation is subject to regulation by the Pennsylvania Department of Banking and the Federal Reserve Board. The deposits
of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is a member of the Bank Insurance Fund which is administered by the FDIC. The Bank is therefore subject to regulation by the FDIC but, as a national
bank, is primarily regulated and examined by the OCC.
3
The Corporation is required to file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Federal Reserve Board may also make examinations of the Corporation. The BHC Act requires each bank
holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would
own or control, directly or indirectly, more than five percent of the voting shares of such bank.
Pursuant to provisions of the BHC Act
and regulations promulgated by the Federal Reserve Board thereunder, the Corporation may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be closely related to the business of banking or managing or
controlling banks, and the Corporation must gain permission from the Federal Reserve Board prior to engaging in most new business activities.
A bank holding company and its subsidiaries are subject to certain restrictions imposed by the BHC Act on any extensions of credit to the Bank or any of its subsidiaries, investments in the stock or securities thereof, and on the taking of
such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or
furnishing of services.
Source of Strength Doctrine
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 in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to
meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both.
This doctrine is commonly known as the “source of strength” doctrine.
Dividends
Dividends are paid by the Corporation from its earnings, which are mainly provided by dividends from the Bank. However, certain regulatory restrictions
exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in
any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this restriction, at December 31, 2007, the Bank, without prior regulatory
approval, could currently declare dividends to the Corporation totaling approximately $4,592,000.
4
Capital Adequacy
The federal banking regulators have adopted risk-based capital guidelines for bank holding companies and banks, such as the Corporation and the Bank. Currently, the required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, non-cumulative
perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder (Tier 2 capital) may consist of a limited amount of
subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets)
guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Corporation and the Bank exceed all applicable capital requirements.
FDICIA
The Federal Deposit Insurance
Corporation Improvement Act (“FDICIA”) was enacted into law in 1991. FDICIA established five different levels of capitalization of financial institutions, with “prompt corrective actions” and significant operational restrictions
imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at
least 6%, a leverage capital ratio of 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An institution falls within the adequately capitalized category if it has a total risk-based capital
ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically
undercapitalized, depending on their actual capital levels. In addition, the appropriate federal regulatory agency may downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound
condition, or is engaged in an unsafe or unsound practice. Institutions are required under FDICIA to closely monitor their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. Regulatory
oversight of an institution becomes more
5
stringent with each lower capital category, with certain “prompt corrective actions” imposed depending on the level of capital deficiency. On
December 31, 2007, the Corporation and the Bank each exceeded the minimum capital levels of the well capitalized category.
Other
Provisions of FDICIA
Each depository institution must submit audited financial statements to its primary regulator and the FDIC, which
reports are made publicly available. In addition, the audit committee of depository institutions with assets of $500 million or more must consist of a majority of outside directors and the audit committee of depository institutions with $1 billion
or more in total assets must consist entirely of outside directors. In addition, an institution must notify the FDIC and the institution’s primary regulator of any change in the institution’s independent auditor, and annual management
letters must be provided to the FDIC and the depository institution’s primary regulator.
Under FDICIA, each federal banking agency
must prescribe certain safety and soundness standards for depository institutions and their holding companies. Three types of standards must be prescribed: asset quality and earnings, operational and managerial, and compensation. Such standards
would include a ratio of classified assets to capital, minimum earnings, and, to the extent feasible, a minimum ratio of market value to book value for publicly traded securities of such institutions and holding companies. Operational and managerial
standards must relate to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) interest rate exposure, (v) asset growth, and (vi) compensation,
fees and benefits.
Provisions of FDICIA relax certain requirements for mergers and acquisitions among financial institutions, including
authorization of mergers of insured institutions that are not members of the same insurance fund, and provide specific authorization for a federally chartered savings association or national bank to be acquired by an insured depository institution.
Under FDICIA, all depository institutions must provide 90 days notice to their primary federal regulator of branch closings, and penalties
are imposed for false reports by financial institutions. Depository institutions with assets in excess of $500 million must be examined on-site annually by their primary federal or state regulator or the FDIC.
FDIC Insurance and Assessments
Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The Bank’s deposits, therefore, are
subject to FDIC deposit insurance assessments.
On February 15, 2006, federal legislation to reform federal deposit insurance was
enacted. This new legislation required, among other things, that the FDIC adopt regulations for
6
considering an increase in the insurance limits on all deposit accounts (including retirement accounts) every five years starting in 2011 based, in part, on
inflation, and modifying the deposit fund’s reserve ratio for a range between 1.15% and 1.50% of estimated insured deposits.
On
November 2, 2006, the FDIC adopted final regulations establishing a risk-based assessment system that will enable the FDIC to more closely tie each financial institution’s premiums to the risk it poses to the deposit insurance fund. Under
the new risk-based assessment system, which becomes effective in the beginning of 2007, the FDIC will evaluate the risk of each financial institution based on three primary sources of information: (1) its supervisory rating, (2) its
financial ratios, and (3) its long-term debt issuer rating, if the institution has one. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. At the same
time, the FDIC also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.
Effective March 31, 2006, the FDIC merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single insurance fund called the Deposit Insurance Fund. As
a result of the merger, the BIF and SAIF were abolished. The merger of the BIF and SAIF into the Deposit Insurance Fund does not affect the authority of the Financing Corporation (“FICO”) to impose and collect, with approval of the FDIC,
assessments for anticipated payments, insurance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through
2019. For the quarter ended June 30, 2007, the FICO assessment was equal to 1.28 basis points for each $100 in domestic deposits maintained at an institution.
In 2007, the Bank’s FDIC assessment was $27,000.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 (“CRA”) and implementing regulations of the banking agencies, a financial institution has a
continuing and affirmative obligation, consistent with safe and sound operation, to meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs
for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services it believes to be best suited to its particular community. The CRA requires that bank regulatory agencies conduct regular
CRA examinations and provide written evaluations of institutions’ CRA performance. The CRA also requires that an institution’s CRA performance rating be made public. CRA performance evaluations are based on a four-tiered rating system:
Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an
institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. A bank holding company cannot elect to be a “financial holding company” with the
expanded securities,
7
insurance and other powers that designation entails unless all of the depository institutions owned by the holding company have a CRA rating of satisfactory
or better. The Gramm-Leach-Bliley Act also provides that a financial institution with total assets of $250 million or less, such as the Bank, will be subject to CRA examinations no more frequently than every 5 years if its most recent CRA rating was
“outstanding,” or every 4 years if its rating was “satisfactory.” Following a CRA examination as of November 17, 2003, the Bank received a rating of “satisfactory.”
Financial Services Modernization Legislation
The Gramm-Leach-Bliley Act of 1999 has had and will continue to have a significant impact on all financial institutions, including banks. The impact of the act is two-fold. First, the Act has swept away much of the regulatory structure
established in the 1930’s under the Glass-Steagall Act. The law creates opportunities for banks, other depository institutions, insurance companies, and securities firms to enter into business combinations that permit a single financial
services organization to offer customers a complete array of financial products. The result will be increased competition in the market place for banks and other financial institutions, tempered by an enhanced ability to compete in this new market.
Banks, insurance companies and securities firms may now affiliate through a “financial holding company” and engage in a broad range of activities authorized by the Federal Reserve Board and the Department of Treasury. The new activities
that the Act permits for financial holding companies and their affiliates are those that are financial in nature or incidental to financial activities, including insurance underwriting, investment banking, investment advisory services and securities
brokerage services. The Federal Reserve maintains the authority to require that the financial holding company remain well capitalized and well managed. We have not elected to become a financial holding company.
In addition, national banks are authorized to conduct these activities through “financial subsidiaries,” under the supervision of the
Department of Treasury’s Office of the Comptroller of the Currency, except that national bank subsidiaries may not engage in insurance underwriting, merchant banking, insurance company portfolio investment, or real estate investment and
development.
Secondly, the Act has altered the regulatory boundaries for all financial services organizations, including the Bank. For
example, by repealing an exemption from SEC broker/dealer registration formerly enjoyed by banks for their securities activities, the Act adds a potential layer of SEC regulation to the bank’s regulatory structure.
To the extent that the Gramm-Leach-Bliley Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Bank is able to offer and that can aggressively compete in the markets that the Bank
intends to serve.
8
Other Laws and Regulations
State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank’s loans are
also subject to federal laws applicable to credit transactions, such as the following:
|
|
•
|
|
Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
|
|
|
•
|
|
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable public officials to determine whether a financial institution is
fulfilling its obligations to meet the housing needs of the community it serves;
|
|
|
•
|
|
Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;
|
|
|
•
|
|
Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and
prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
|
|
|
•
|
|
Fair Credit Reporting Act governing the manner in which consumer debts may be collected by collection agencies; and
|
|
|
•
|
|
Various rules and regulations of various federal agencies charged with the implementation of such federal laws.
|
Additionally, our operations are subject to the additional federal laws and regulations, including, without limitation:
|
|
•
|
|
Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require us to maintain privacy policies intended to safeguard customer financial
information, to disclose the policies to our customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain
exceptions;
|
|
|
•
|
|
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records;
|
|
|
•
|
|
Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-Bliley Act; and
|
|
|
•
|
|
Title III of the USA Patriot Act, which requires financial institutions to take certain actions to help prevent, detect and prosecute international money laundering
and the financing of terrorism.
|
9
Proposed Legislation and Regulations
From time to time, various federal and state legislation is proposed that could result in additional regulation of, and restrictions on, the business of
the Corporation or the Bank, or otherwise change the business environment. We cannot predict whether any of this legislation, if enacted, will have a material effect on the business of the Corporation or the Bank.
Employees
As of December 31, 2007, the
Bank had a total of 68 full-time and 50 part-time employees.
Selected Statistical Information
Certain statistical information is included as part of Management’s Discussion and Analysis of Financial Conditions and Results of Operations,
included on pages 36 through 52 of the Annual Report to Shareholders for the year ended December 31, 2007, attached to this Report as Exhibit 13 and incorporated herein by reference.
There are a number of factors,
including those specified below, that may adversely affect the Corporation’s business, financial results or stock price. Additional risks that the Corporation currently does not know about or currently views as immaterial may also impair the
Corporation’s business or adversely impact its financial results or stock price.
Changes in interest rates may have an adverse effect on our
profitability.
Our business is affected by fiscal and monetary policies of the federal government, including those of the Federal
Reserve Board, which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits.
Interest income is the most significant component of our net income, accounting for approximately 88.8% of total revenues in 2007 and 88.6% of total
revenues in 2006. The narrowing of interest rate spreads (the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings), could adversely affect our earnings and financial condition. Among
other things, regional and local economic conditions as well as fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, may affect prevailing interest rates. We cannot predict or control changes in
interest rates.
10
Changes in economic conditions and the composition of our loan portfolio could lead to higher loan charge-offs or
an increase in our allowance for loan losses and may reduce our income.
Changes in national and regional economic conditions could
impact the Bank’s loan portfolio. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities we serve. Weakness in the
market areas served by the Bank could depress our earnings and consequently our financial condition because:
|
|
•
|
|
customers may not want or need our products or services;
|
|
|
•
|
|
borrowers may not be able to repay their loans;
|
|
|
•
|
|
the value of the collateral securing our loans to borrowers may decline; and
|
|
|
•
|
|
the quality of our loan portfolio may decline.
|
Any of the latter three scenarios could require the Bank to charge-off a higher percentage of its loans and/or increase its provision for loan and lease losses, which would reduce its income.
In addition, the amount of the Bank’s provision for loan losses and the percentage of loans it is required to charge-off may be impacted by the
overall risk composition of the loan portfolio. While we believe that the Bank’s allowance for loan losses as of December 31, 2007 is sufficient to cover losses inherent in the loan portfolio on each of those dates, we cannot assure
investors that the Bank will not be required in the future to increase its loan-loss provision or charge-off a higher percentage of loans due to changes in the risk characteristics of the loan portfolio, which would thereby reduce our net income.
The competition we face is increasing and may reduce our customer base and negatively impact our results of operations.
There is significant competition among commercial banks in the market areas we serve. In addition, as a result of the deregulation of the financial
industry, we also compete with other providers of financial services such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds
industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than us with respect to the products and services they provide. Some of our competitors, including certain super-regional
and national bank holding companies that have made acquisitions in our market area, have greater resources than we have, and as such, may have higher lending limits and may offer other services we do not offer.
11
We also experience competition from a variety of institutions outside our market areas. Some of these
institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Competition may adversely affect the interest rates we pay on deposits and charges on loans, thereby potentially adversely affecting our profitability.
Our profitability depends upon our continued ability to successfully compete in the market areas we serve while achieving our investment objectives.
The supervision and regulation to which we are subject can be a competitive disadvantage.
We are a bank holding
company, and the Bank is a national banking association whose deposits are insured by the FDIC. As a result, the company and the Bank are each subject to various regulations and examinations by various regulatory authorities. In general, statutes
establish the corporate governance and permitted business activities, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, and capital adequacy requirements, requirements for anti-money
laundering programs and other compliance matters, among other regulations. We are extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance
funds and the banking system as a whole. Compliance with these statutes and regulations is important to our ability to engage in new activities and to consummate additional acquisitions. In addition, we are subject to changes in federal and state
tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. We cannot predict whether any of these changes may adversely and materially affect us. Federal and state banking
regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on our activities that could have a material
adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases our
expenses, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to unregulated competitors.
The
Corporation relies on dividends from the Bank for most of its revenue.
The Corporation is a separate and distinct legal entity
from its subsidiaries. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on the Corporation’s common stock and interest and principal on its debt.
Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Corporation. Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s creditors.
12
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and
procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
There is no established public market for our common stock.
There are presently no
broker-dealers that make a market in our common stock. Consequently, shares of our common stock are traded from time to time in private transactions. There can be no assurance that at any given time any persons will be interested in acquiring shares
of our common stock. Accordingly, persons interested in purchasing shares must be willing to bear the general economic risks of an investment in the shares for an indefinite period of time. Such risks include, among other things, changes in
governmental rules and fiscal policies, changes in employment and other changes in the economy generally.
Our stock price can be volatile.
The price at which our common stock trades may fluctuate in response to numerous factors, including variations in our annual or quarterly
financial results, or those of our competitors, changes by financial research analysts in their estimates of our earnings or our competitors earnings or our failure or that of our competitors to meet such estimates, conditions in the economy in
general or the banking industry in particular, or unfavorable publicity affecting us, the Bank, or the industry. In addition, equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market price
for many companies’ securities and have been unrelated to the operating performance of those companies. Any fluctuation may adversely affect the price at which our common stock may trade.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently
risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you
may lose some or all of your investment.