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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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Commission File Number: 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
612 Main Street, Emlenton, Pennsylvania 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's common stock was
1,267,835 at August 11, 2005.
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EMCLAIRE FINANCIAL CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004....................................1
Consolidated Statements of Income for the three and six
months ended June 30, 2005 and 2004....................................2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004....................................3
Consolidated Statement of Changes in Stockholders'
Equity for the three and six months ended June 30, 2005 and 2004.......4
Notes to Consolidated Financial Statements.............................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............17
Item 4. Controls and Procedures...............................................17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.....................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........18
Item 3. Defaults upon Senior Securities.......................................18
Item 4. Submission of Matters to a Vote of Security Holders...................18
Item 5. Other Information.....................................................18
Item 6. Exhibits..............................................................18
Signatures....................................................................19
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
- ------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2005 (Unaudited) and December 31, 2004
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2005 2004
------------ ------------
Assets
------
Cash and due from banks $ 7,763 $ 7,769
Interest earning deposits in banks 1,389 6,855
------------ ------------
Cash and cash equivalents 9,152 14,624
Securities available for sale 61,758 63,346
Securities held to maturity; fair value of $15 and
$16 15 16
Loans held for sale 198 386
Loans receivable, net of allowance for loan losses
of $1,875 and $1,810 187,415 179,575
Federal bank stocks, at cost 1,623 1,731
Bank-owned life insurance 4,540 4,448
Accrued interest receivable 1,209 1,203
Premises and equipment, net 5,642 5,678
Goodwill 1,422 1,422
Other intangibles 17 38
Prepaid expenses and other assets 1,178 913
------------ ------------
Total Assets $ 274,169 $ 273,380
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 42,715 $ 40,511
Interest bearing 190,069 192,363
------------ ------------
Total deposits 232,784 232,874
Short term borrowed funds 500 -
Long term borrowed funds 15,000 15,000
Accrued interest payable 577 577
Accrued expenses and other liabilities 1,426 1,313
------------ ------------
Total Liabilities 250,287 249,764
------------ ------------
Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares
authorized; none issued - -
Common stock, $1.25 par value, 12,000,000 shares
authorized; 1,395,852 shares issued; 1,267,835
shares outstanding 1,745 1,745
Additional paid-in capital 10,871 10,871
Treasury stock, at cost; 128,017 shares (2,653) (2,653)
Retained earnings 12,985 12,398
Accumulated other comprehensive income 934 1,255
------------ ------------
Total Stockholders' Equity 23,882 23,616
------------ ------------
Total Liabilities and Stockholders' Equity $ 274,169 $ 273,380
============ ============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three and six months ended June 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Interest and dividend income:
Loans receivable, including fees $ 3,131 $ 2,882 $ 6,015 $ 5,866
Securities:
Taxable 439 341 884 630
Exempt from federal income tax 174 174 348 348
Federal bank stocks 17 11 30 22
Deposits with banks and federal funds sold 21 10 49 15
------------ ------------ ------------ ------------
Total interest and dividend income 3,782 3,418 7,326 6,881
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,186 1,103 2,384 2,194
Borrowed funds 156 156 312 317
------------ ------------ ------------ ------------
Total interest expense 1,342 1,259 2,696 2,511
------------ ------------ ------------ ------------
Net interest income 2,440 2,159 4,630 4,370
Provision for loan losses 45 20 105 75
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,395 2,139 4,525 4,295
------------ ------------ ------------ ------------
Noninterest income:
Fees and service charges 366 290 621 554
Commissions on financial services 161 - 260 -
Gains on sales of securities 86 86 219 169
Gain (loss) on the sale of loans - - 3 (2)
Earnings on bank-owned life insurance 50 56 100 112
Other 94 89 210 169
------------ ------------ ------------ ------------
Total noninterest income 757 521 1,413 1,002
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 1,278 1,086 2,502 2,172
Premises and equipment, net 354 302 680 604
Intangible amortization expense 10 8 21 16
Other 688 612 1,214 1,166
------------ ------------ ------------ ------------
Total noninterest expense 2,330 2,008 4,417 3,958
------------ ------------ ------------ ------------
Income before provision for income taxes 822 652 1,521 1,339
Provision for income taxes 168 129 300 252
------------ ------------ ------------ ------------
Net income $ 654 $ 523 $ 1,221 $ 1,087
============ ============ ============ ============
Basic earnings per share $ 0.52 $ 0.41 $ 0.96 $ 0.86
Average common shares outstanding 1,267,835 1,267,835 1,267,835 1,267,835
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the six months
ended
June 30,
--------------------
2005 2004
--------- ---------
Operating activities:
Net income $ 1,221 $ 1,087
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 404 335
Provision for loan losses 105 75
Amortization of premiums and accretion of discounts, net 69 117
(Gain) Loss on sale of loans (3) 2
Loans originated for sale (156) (176)
Proceeds from sales of loans held for sale 342 -
(Gains) on sales of securities (219) (169)
Earnings on bank-owned life insurance, net (92) (104)
Amortization of intangible assets and mortgage servicing
rights 24 18
Change in accrued interest receivable (6) 69
Change in prepaid expenses and other assets 26 (289)
Change in accrued interest payable (0) 16
Change in accrued expenses and other liabilities 113 8
--------- ---------
Net cash from operating activities 1,828 989
--------- ---------
Investing Activities:
Loan originations and principal collections, net (8,043) 6,236
Available-for-sale securities:
Sales 742 466
Maturities, prepayments and calls 3,921 6,725
Purchases (3,396) (13,754)
Held-to-maturity securities:
Maturities, prepayments and calls 1 1
Redemption (Purchases) of Federal bank stocks 108 298
Purchases of premises and equipment (409) (672)
--------- ---------
Net cash from investing activities (7,076) (700)
--------- ---------
Financing Activities:
Net (decrease) increase in deposits (90) 10,494
Increase (decrease) in overnight borrowed funds 500 (5,700)
Dividends paid on common stock (634) (584)
--------- ---------
Net cash from financing activities (224) 4,210
--------- ---------
Net (decrease) increase in cash equivalents (5,472) 4,499
Cash equivalents at beginning of period 14,624 7,703
--------- ---------
Cash equivalents at end of period $ 9,152 $ 12,202
========= =========
Supplemental information:
Interest paid $ 2,696 $ 2,495
Income taxes paid 167 120
Supplemental noncash disclosures:
Transfers from loans to repossessed assets $ 86 $ 30
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
For the three and six months ended June 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the three months For the six months
ended ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Balance at beginning of period $ 23,166 $ 23,204 $ 23,616 $ 22,655
Net income 654 523 1,221 1,087
Change in net unrealized gain on available for sale
securities, net of taxes 437 (817) (176) (487)
Less reclassification adjustment for gains included
in net income, net of taxes (57) (59) (145) (112)
--------- --------- --------- ---------
Other comprehensive income (loss) 380 (876) (321) (599)
--------- --------- --------- ---------
Total comprehensive income (loss) 1,034 (353) 900 488
Dividends declared (318) (292) (634) (584)
--------- --------- --------- ---------
Balance at end of period $ 23,882 $ 22,559 $ 23,882 $ 22,559
========= ========= ========= =========
Common cash dividend per share $ 0.25 $ 0.23 $ 0.50 $ 0.46
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
Emclaire Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation.
Emclaire Financial Corp. (the Corporation) is a Pennsylvania company
organized as the holding company of Farmers National Bank of Emlenton (the
Bank). The Corporation provides a variety of financial services to
individuals and businesses through its offices in western Pennsylvania. Its
primary deposit products are checking, savings and certificate of deposit
accounts and its primary lending products are residential and commercial
mortgage, commercial business and consumer loans.
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All intercompany
transactions and balances have been eliminated in preparing the
consolidated financial statements.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not include
all information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. For further information, refer to the audited consolidated
financial statements and footnotes thereto for the year ended December 31,
2004, as contained in the Corporation's 2004 Annual Report to Stockholders.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses. The results of
operations for interim quarterly or year to date periods are not
necessarily indicative of the results that may be expected for the entire
year or any other period. Certain amounts previously reported may have been
reclassified to conform to the current year's financial statement
presentation.
2. Basic Earnings per Common Share.
The Corporation maintains a simple capital structure with no common stock
equivalents. Basic earnings per common share is calculated using net income
divided by the weighted average number of common shares outstanding during
the period. The Corporation's capital structure contains no potentially
dilutive securities.
3. Employee Benefit Plans.
Defined Contribution Plan.
-------------------------
The Corporation maintains a defined contribution 401(k) Plan. Employees are
eligible to participate by providing tax-deferred contributions up to 20%
of qualified compensation. Employee contributions are vested at all times.
The Corporation makes matching contributions as approved by the Board of
Directors. Matching contributions for the three months ended June 30, 2005
and 2004 amounted to $19,000 and $17,000, respectively. Matching
contributions for the six months ended June 30, 2005 and 2004 amounted to
$37,000 and $33,000, respectively.
5
3. Employee Benefit Plans (Continued).
Defined Benefit Plan.
---------------------
The Corporation provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all employees participate in
the retirement plan on a non-contributing basis and are fully vested after
five years of service.
The Corporation uses a December 31 measurement date for its plans.
Information pertaining to the components of the periodic pension cost is as
follows:
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For the three For the six
months ended months ended Year ended
June 30, June 30, December 31,
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(Dollar amounts in thousands) 2005 2004 2005 2004 2004
- -------------------------------------------- ------ ------ ------ ------------
Service cost $ 42 $ 41 $ 84 $ 82 $ 158
Interest cost 51 46 102 92 187
Expected return on plan assets (61) (53) (122) (106) (209)
Transition asset (2) (2) (4) (4) (8)
Prior service costs (8) (8) (16) (16) (10)
Recognized net actuarial (gain) loss 9 8 18 16 -
------ ------ ------ ------ ------------
Net periodic pension cost $ 31 $ 32 $ 62 $ 64 $ 118
====== ====== ====== ====== ============
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The expected rate of return on plan assets is 8.50% for the periods ended
June 30, 2005 and 2004. The Corporation expects to contribute $135,000 to
its pension plan in 2005.
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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June 30, December 31,
(Dollar Amounts In thousands) 2005 2004
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Mortgage loans:
Residential first mortgage $ 66,819 $ 69,310
Home equity 38,455 31,548
Commercial real estate 50,844 48,539
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156,118 149,397
Other loans:
Commercial business 24,786 23,898
Consumer 8,386 8,090
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33,172 31,988
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Total loans, gross 189,290 181,385
Less allowance for loan losses 1,875 1,810
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Total loans, net $ 187,415 $ 179,575
========== ============
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6
5. Guarantees
----------
The Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Of
these letters of credit at June 30, 2005, $181,000 automatically renews
within the next twelve months, $56,000 will expire within the next twelve
months and $340,000 will expire within thirteen to fifty-two months. The
Corporation, generally, holds collateral and/or personal guarantees
supporting these commitments. Management believes that the proceeds
obtained through a liquidation of collateral and the enforcement of
guarantees would be sufficient to cover the potential amount of future
payment required under the corresponding guarantees. The credit risk
involved in issuing letters of credit is essentially the same as those that
are involved in extending loan facilities to customers. The current amount
of the liability as of June 30, 2005 for guarantees under standby letters
of credit issued is not material.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
-------------
This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp. (the Corporation) and its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the Bank), for the three
and six month periods ended June 30, 2005 and should be read in conjunction with
the Corporation's Annual Report or Form 10-K filed with the Securities and
Exchange Commission and with the accompanying consolidated financial statements
and notes presented on pages 1 through 7 of this Form 10-Q.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses and general
economic conditions. 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.
CHANGES IN FINANCIAL CONDITION
Total assets increased $789,000 to $274.2 million at June 30, 2005 from $273.4
million at December 31, 2004. This increase was primarily due to an increase in
loans receivable of $7.8 million. Partially offsetting this increase were
decreases in cash and cash equivalents and securities of $5.5 million and $1.6
million, respectively.
Cash and cash equivalents decreased $5.5 million or 37.4% to $9.2 million at
June 30, 2005 from $14.6 million at December 31, 2004 primarily to fund the
increase in loans receivable of $7.8 million.
Loans held for sale decreased $188,000 or 48.7% to $198,000 at June 30, 2005
from $386,000 at December 31, 2004. During the first quarter 2005, the
Corporation sold $189,000 of its student loan portfolio resulting in a gain of
$3,000. The remaining balance of this portfolio, which is classified as loans
held for sale is $198,000 and is anticipated to be sold in July 2005.
Loans receivable increased $7.8 million or 4.4% to $187.4 million at June 30,
2005 from $179.6 million at December 31, 2004 due primarily to increases in our
commercial and home equity loans. The increase in commercial mortgages and
business loans was a result of the growth in the commercial real estate market,
the lower interest rate environment and the continued focus by management on
commercial lending. The increase in home equity loans was due primarily to a
loan campaign put forth during the year which offered an introductory rate of
4.99% for the first 18 months of the loan. This campaign will continue into the
third quarter 2005 but will offer a slightly higher introductory rate.
Stockholders' equity increased $266,000 or 1.1% to $23.9 million at June 30,
2005 from $23.6 million at December 31, 2004. This increase was the result of
net income of $1.2 million offset by dividends declared of $634,000 and a
decrease in accumulated other comprehensive income of $321,000.
7
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended June 30, 2005 and 2004
General. Net income increased $131,000 or 25.1% to $654,000 for the three months
ended June 30, 2005 from $523,000 for the same period in 2004. This increase was
a result of increases in net interest income and noninterest income of $281,000
and $236,000, respectively, offset by increases in noninterest expense, the
provisions for loan losses and income taxes of $322,000, $25,000 and $39,000,
respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$279,000 or 12.3% to $2.5 million for the three months ended June 30, 2005 from
$2.3 million for the same period in 2004. This net increase can be attributed to
an increase in interest income of $362,000 offset by an increase in interest
expense of $83,000.
Interest income. Interest income on a tax equivalent basis increased $362,000 or
10.3% to $3.9 million for the three months ended June 30, 2005, compared to $3.5
million for the same period in the prior year. This increase in interest income
can be attributed to an increase in the average total interest-earning assets of
$9.3 million and a 34 basis point increase in the interest rate on average
interest-earning assets to 6.10% during the three months ended June 30, 2005,
compared to 5.76% for the same period in the prior year.
The average balance of securities increased $9.9 million or 18.3% to $64.2
million for the three months ended June 30, 2005, compared to $54.3 million for
the same period in the prior year. The increase in volume contributed an
additional $106,000 to interest income. The increase in securities was a result
of investing deployable funds into US government agencies and mortgage-backed
securities to supplement loan originations.
The average balance of interest-earning cash equivalents decreased $227,000 or
4.4% to $4.9 million for the three months ended June 30, 2005, compared to $5.1
million for the same period in the prior year. The yield on average
interest-earning cash equivalents increased 147 basis points to 3.12% during the
three months ended June 30, 2005, compared to 1.65% for the same period in the
prior year. The increase in yield, which was primarily due to an increase in
market rates, contributed an additional $11,000 to interest income.
Offsetting the increase in average interest-earning assets was a decrease in the
average balance of loans receivable of $349,000 to $186.3 million for the three
months ended June 30, 2005, compared to $186.7 million for the same period in
the prior year. Offsetting the decrease due to volume was an increase in the
average yield of loans receivable to 6.81% during the three months ended June
30, 2005, compared to 6.28% during the same period in the prior year.
During the three months ended June 30, 2005, the Corporation recognized $160,000
of additional interest income which consisted of $140,000 of interest income on
a commercial lending relationship that had been in nonaccrual status for a
significant period of time and a $20,000 prepayment penalty on a commercial
mortgage. These amounts are included in interest income and affect the yield on
the loan portfolio for the quarter. Net of this additional income, the yield on
the loan portfolio and the net interest margin would have been 6.46% and 3.74%,
respectively, during the three month period ending June 30, 2005 compared to
6.28% and 3.70%, respectively, during the same period in the prior year.
Interest expense. Interest expense increased $83,000 or 6.6% to $1.3 million for
the three months ended June 30, 2005, compared to $1.2 million for the same
period in the prior year. This increase in interest expense can be attributed to
an increase in the average balance of interest-bearing liabilities, as average
interest-bearing deposits increased to $191.5 million during the three months
ended June 30, 2005, compared to $186.9 million during the same period in the
prior year. The interest rate on average interest-bearing liabilities was 2.61%
and 2.51% for the three months ended June 30, 2005 and 2004, respectively. The
average cost of deposits was 2.48% and 2.37% for the three months ended June 30,
2005 and 2004, respectively.
8
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan costs. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
- ----------------------------------------------------------------------------------------------------------
Three months ended June 30,
----------------------------------------------------------
2005 2004
---------------------------- ----------------------------
Average Yield/ Average Yield/
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $ 179,271 $ 3,052 6.83% $ 179,327 $ 2,800 6.28%
Loans, tax exempt 7,073 111 6.29% 7,366 116 6.34%
---------- -------- ---------- --------
Total Loans Receivable 186,344 3,163 6.81% 186,693 2,916 6.28%
---------- -------- ---------- --------
Securities, taxable 48,776 439 3.61% 39,206 341 3.50%
Securities, tax exempt 15,403 246 6.41% 15,048 247 6.59%
---------- -------- ---------- --------
Total Securities 64,179 685 4.28% 54,254 588 4.36%
---------- -------- ---------- --------
Interest earning cash equivalents 3,344 21 2.52% 3,421 10 1.18%
Federal bank stocks 1,540 17 4.43% 1,690 11 2.62%
---------- -------- ---------- --------
Total Interest Earning Cash Equivalents 4,884 38 3.12% 5,111 21 1.65%
---------- -------- ---------- --------
Total interest-earning assets 255,407 3,886 6.10% 246,058 3,525 5.76%
Cash and due from banks 7,781 6,927
Other noninterest-earning assets 12,378 12,043
---------- ----------
Total Assets $ 275,566 $ 265,028
========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest bearing demand deposits $ 80,328 $ 135 0.67% $ 74,783 $ 98 0.53%
Time deposits 111,192 1,051 3.79% 112,073 1,005 3.61%
---------- -------- ---------- --------
Total Interest Bearing Deposits 191,520 1,186 2.48% 186,856 1,103 2.37%
---------- -------- ---------- --------
Borrowed funds, term 15,000 156 4.17% 15,000 156 4.18%
Borrowed funds, overnight 38 - 0.00% - - 0.00%
---------- -------- ---------- --------
Total Borrowed Funds 15,038 156 4.16% 15,000 156 4.18%
---------- -------- ---------- --------
Total interest-bearing liabilities 206,558 1,342 2.61% 201,856 1,259 2.51%
Noninterest bearing demand deposits 42,292 - - 38,482 -
---------- -------- ---------- --------
Funding and cost of funds 248,850 1,342 2.16% 240,338 1,259 2.11%
Other noninterest bearing liabilities 2,703 2,067
---------- ----------
Total Liabilities 251,553 242,405
Stockholders' Equity 24,013 22,623
---------- ----------
Total Liabilities and Stockholders' Equity $ 275,566 $ 265,028
========== -------- ========== --------
Net interest income $ 2,544 $ 2,266
======== ========
Interest rate spread (difference between 3.49% 3.25%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 4.00% 3.70%
income as a percentage of average
interest-earning assets)
- ----------------------------------------------------------------------------------------------------------
9
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
- ----------------------------------------------------------------------------
Three months ended June 30,
2005 versus 2004
Increase (Decrease) due to
--------------------------------
(Dollar amounts in thousands) Volume Rate Total
- ----------------------------------------------------------------------------
Interest income:
Loans $ (5) $ 253 $ 248
Securities 106 (9) 97
Interest-earning cash equivalents - 11 11
Federal bank stocks (1) 7 6
------ ------ ------
Total interest-earning assets 100 262 362
------ ------ ------
Interest expense:
Deposits 28 55 83
------ ------ ------
Total interest-bearing liabilities 28 55 83
------ ------ ------
Net interest income $ 72 $ 207 $ 279
====== ====== ======
- ----------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of the allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectibility of the
loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the quarter ended June 30, 2005 and 2004 is as follows:
- --------------------------------------------------------------------------------
For the three months
ended
June 30,
----------------------
(Dollar amounts in thousands) 2005 2004
- --------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,850 $ 1,827
Provision for Loan Losses 45 20
Charge-Offs (29) (47)
Recoveries 9 9
--------- ---------
Balance at the end of the period $ 1,875 $ 1,809
========= =========
Non-performing loans $ 1,723 $ 1,190
Non-performing assets 1,811 1,190
Non-performing loans to total loans 0.91% 0.64%
Non-performing assets to total assets 0.66% 0.45%
Allowance for loan losses to total loans 0.99% 0.97%
Allowance for loan losses to non-performing loans 108.82% 152.02%
- --------------------------------------------------------------------------------
10
The provision for loan losses increased $25,000 to $45,000 for the three month
period ended June 30, 2005 from $20,000 for the same period in the prior year.
Management's evaluation of the loan portfolio, including economic trends,
regulatory considerations and other factors contributed to the recognition of
$45,000 in the provision for loan losses during the three months ended June 30,
2005.
Noninterest income. Noninterest income increased $236,000 or 45.3% to $757,000
during the three months ended June 30, 2005, compared to $521,000 during the
same period in the prior year. This increase can be attributed to increases in
customer fees and service charges and commissions earned on financial services
of $76,000 and $161,000, respectively.
The increase in customer fees and service charges of $76,000 or 26.2% was
primarily a result of the new overdraft privilege program, which was implemented
in April 2005.
In July 2004 the Corporation entered into an agreement with Blue Vase
Securities, LLC to provide investment advisory services to our customers, and
operates as Farmers National Financial Services. Blue Vase Securities, LLC is a
nation-wide, full-service, independent broker/dealer that offers various
services such as investments, insurance, wealth management, advisory services,
estate and retirement planning and account consolidation. This partnership has
enabled us to provide our customers with financial solutions that extend outside
the Bank's ordinary deposit products and services. The Corporation earns
commissions from providing this service and recognized $161,000 during the
second quarter 2005.
Noninterest expense. Noninterest expense increased $322,000 or 16.0% to $2.3
million during the three months ended June 30, 2005, compared to $2.0 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in compensation and employee benefits, premises
and equipment and other noninterest expense of $192,000, $52,000 and $76,000,
respectively.
Compensation and employee benefits expense increased $192,000 or 17.7% to $1.3
million during the three months ended June 30, 2005, compared to $1.1 million
for the same period in the prior year. Normal annual salary and wage
adjustments, increased health insurance costs, higher director's fees and
commissions paid to our financial services representative of $79,000 were the
major components of this increase. Also contributing to the increase was the
addition of a new compliance officer and a new credit analyst in November 2004.
Premises and equipment expense increased $52,000 or 17.2% to $354,000 during the
three months ended June 30, 2005, compared to $302,000 for the same period in
the prior year. This increase can be primarily attributed to increased building
and equipment depreciation expenses, repairs and maintenance and other building
and equipment expenses. Also contributing to the increase was a change in the
estimated useful life of an asset which will be abandoned in the fourth quarter
2005. Additional depreciation of $27,000 was recorded in June 2005 as a result
of this change and will continue through October 2005 for a total of $108,000.
Other noninterest expense increased $76,000 or 12.4% to $688,000 during the
three months ended June 30, 2005, compared to $612,000 for the same period in
the prior year. This increase can be attributed primarily to increases in
professional fees, travel and entertainment expenses, insurance costs and other
expenses. Partially offsetting these increases were decreases in telephone and
communications and marketing expenses between the two periods, as discussed
below.
o Telephone and communication expenses decreased $57,000 as a result of
the resolution of contract issues related to two telephone vendors
during 2004.
o Travel and entertainment expenses increased $25,000 as a result of the
increased efforts in our Corporate Banking area and travel associated
with training throughout the organization as well as the increase in
the IRS mileage rate to $.405 in 2005. Also contributing to the
increase in entertainment expenses was our first annual golf outing
hosted by our Corporate Banking department.
o Professional fees increased $63,000 as a result of costs associated
with Sarbanes-Oxley compliance and the resolution of sales and use tax
issues.
11
Provision for income taxes. The provision for income taxes increased $39,000 or
30.2% to $168,000 for the three months ended June 30, 2005, compared to $129,000
for the same period in the prior year due primarily to an increase in the
Corporation's pre-tax earnings base between the first quarter of 2005 and 2004.
The Corporation's effective tax rate was 18.8% in 2005 compared to 16.7% in
2004. The difference between the statutory rate of 34% and the Corporation's
effective tax rate is due to tax-exempt income earned on loans, securities and
bank-owned life insurance.
Comparison of Results for the Six Month Periods Ended June 30, 2005 and 2004
General. Net income increased $134,000 or 12.3% to $1.2 million for the six
months ended June 30, 2005 from $1.1 million for the same period in 2004. This
increase was a result of increases in net interest income and noninterest income
of $260,000 and $411,000, respectively, offset by increases in the provision for
loan losses and income taxes and noninterest expense of $30,000, $48,000 and
$459,000, respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$256,000 or 5.6% to $4.8 million for the six months ended June 30, 2005 from
$4.6 million for the same period in 2004. This net increase can be attributed to
an increase in interest income of $441,000 offset by an increase in interest
expense of $185,000.
Interest income. Interest income on a tax equivalent basis increased $441,000 or
6.2% to $7.5 million for the six months ended June 30, 2005, compared to $7.1
million for the same period in the prior year. This increase in interest income
can be attributed to an increase in the average total interest-earning assets of
$10.8 million as well as a 12 basis point increase in the interest rate on
average interest-earning assets to 5.95% during the six months ended June 30,
2005, compared to 5.83% for the same period in the prior year.
The average balance of securities increased $12.7 million or 24.4% to $64.6
million for the six months ended June 30, 2005, compared to $52.0 million for
the same period in the prior year. The increase in volume contributed an
additional $270,000 to interest income. The increase in securities was a result
of investing deployable funds into US government agencies and mortgage-backed
securities to supplement loan originations.
The average balance of interest-earning cash equivalents increased $1.9 million
or 42.6% to $6.3 million for the six months ended June 30, 2005, compared to
$4.4 million for the same period in the prior year. The increase in volume
contributed an additional $17,000 to interest income. The yield on average
interest-earning cash equivalents also increased 85 basis points to 2.54% during
the six months ended June 30, 2005, compared to 1.69% for the same period in the
prior year. The increase in yield, which was primarily due to an increase in
market rates, contributed an additional $17,000 to interest income.
Offsetting the increase in average interest-earning assets was a decrease in the
average balance of loans receivable of $3.7 million or 2.0% to $184.5 million
for the six months ended June 30, 2005, compared to $188.2 million for the same
period in the prior year. Offsetting the decrease due to volume was an increase
in the average yield of loans receivable to 6.65% during the six months ended
June 30, 2005, compared to 6.34% during the same period in the prior year.
During the six months ended June 30, 2005, the Corporation recognized $160,000
of additional interest income which consisted of $140,000 of interest income on
a commercial lending relationship that had been in nonaccrual status for a
significant period of time and a $20,000 prepayment penalty on a commercial
mortgage. These amounts are included in interest income and affect the yield on
the loan portfolio for the period. Net of this additional income, the yield on
the loan portfolio and the net interest margin would have been 6.47% and 3.69%,
respectively, during the six month period ending June 30, 2005 compared to 6.34%
and 3.77%, respectively, during the same period in the prior year.
12
Interest expense. Interest expense increased $185,000 or 7.4% to $2.7 million
for the six months ended June 30, 2005, compared to $2.5 million for the same
period in the prior year. This increase in interest expense can be attributed to
an increase in the average balance of interest-bearing liabilities, as average
interest-bearing deposits increased to $191.9 million during the six months
ended June 30, 2005, compared to $184.6 million during the same period in the
prior year. Offsetting this increase in interest-bearing liabilities was a
decrease in the average balance of borrowed funds to $15.0 million during the
six months ended June 30, 2005, compared to $16.0 million during the same period
in the prior year. The interest rate on average interest-bearing liabilities was
2.63% and 2.52% for the six months ended June 30, 2005 and 2004, respectively.
The average cost of deposits was 2.51% and 2.39% for the six months ended June
30, 2005 and 2004, respectively.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resulting average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses and interest income includes accretion of net deferred
loan costs. Interest and yields on tax-exempt loans and securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
- ----------------------------------------------------------------------------------------------------------
Six months ended June 30,
----------------------------------------------------------
2005 2004
---------------------------- ----------------------------
Average Yield/ Average Yield/
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $ 177,325 $ 5,857 6.66% $ 180,742 $ 5,700 6.34%
Loans, tax exempt 7,153 223 6.29% 7,445 234 6.33%
---------- -------- ------ ---------- -------- ------
Total Loans Receivable $ 184,478 $ 6,080 6.65% $ 188,187 $ 5,935 6.34%
---------- -------- ------ ---------- -------- ------
Securities, taxable 49,158 884 3.63% 36,611 630 3.46%
Securities, tax exempt 15,465 492 6.42% 15,350 493 6.45%
---------- -------- ------ ---------- -------- ------
Total Securities 64,623 1,376 4.30% 51,961 1,123 4.34%
---------- -------- ------ ---------- -------- ------
Interest-earning cash equivalents 4,705 49 2.10% 2,600 15 1.16%
Federal bank stocks 1,571 30 3.85% 1,800 22 2.46%
---------- -------- ------ ---------- -------- ------
Total Interest-Earning Cash Equivalents 6,276 79 2.54% 4,400 37 1.69%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets 255,377 7,535 5.95% 244,548 7,094 5.83%
Cash and due from banks 7,663 6,638
Other noninterest-earning assets 12,190 11,724
---------- ----------
Total assets $ 275,230 $ 262,910
========== ==========
Interest-bearing liabilities:
- ----------------------------
Interest-bearing demand deposits $ 80,601 $ 281 0.70% $ 75,645 $ 212 0.56%
Time deposits 111,283 2,103 3.81% 108,992 1,982 3.66%
---------- -------- ------ ---------- -------- ------
Total Interest-Bearing Deposits 191,884 2,384 2.51% 184,637 2,194 2.39%
---------- -------- ------ ---------- -------- ------
Borrowed funds, term 15,000 312 4.19% 15,000 311 4.17%
Borrowed funds, overnight 19 - 0.00% 1,008 6 1.20%
---------- -------- ------ ---------- -------- ------
Total Borrowed Funds 15,019 312 4.19% 16,008 317 3.98%
---------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 206,903 2,696 2.63% 200,645 2,511 2.52%
Noninterest-bearing demand deposits 41,737 - - 37,405 -
---------- -------- ------ ---------- -------- ------
Funding and cost of funds 248,640 2,696 2.19% 238,050 2,511 2.12%
Other noninterest- bearing liabilities 2,538 2,022
---------- ----------
Total liabilities 251,178 240,072
Stockholders' equity 24,052 22,838
---------- ----------
Total liabilities and stockholders' equity $ 275,230 $ 262,910
========== -------- ========== --------
Net interest income $ 4,839 $ 4,583
======== ========
Interest rate spread (difference between 3.32% 3.31%
weighted average rate on interest-earning ====== ======
assets and interest-bearing liabilities)
Net interest margin (net interest 3.82% 3.77%
income as a percentage of average ====== ======
interest-earning assets)
- ----------------------------------------------------------------------------------------------------------
13
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
- ----------------------------------------------------------------------------
Six months ended June 30,
2005 versus 2004
Increase (Decrease) due to
---------------------------------
(Dollar amounts in thousands) Volume Rate Total
---------------------------------
Interest income:
Loans $ (119) $ 264 $ 145
Securities 270 (16) 254
Interest-earning cash equivalents 17 17 34
Federal bank stocks (3) 11 8
------- ------ ------
Total interest-earning assets 165 276 441
------- ------ ------
Interest expense:
Deposits 88 102 190
Borrowed funds (20) 15 (5)
------- ------ ------
Total interest-bearing liabilities 68 117 185
------- ------ ------
Net interest income $ 97 $ 159 $ 256
======= ====== ======
- ----------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of the allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectibility of the
loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the six months ended June 30, 2005 and 2004 is as follows:
- --------------------------------------------------------------------------------
For the six
months ended
June 30, December 31,
----------------- ------------
(Dollar amounts in thousands) 2005 2004 2004
- --------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,810 $ 1,777 $ 1,777
Provision for Loan Losses 105 75 290
Charge-Offs (67) (77) (318)
Recoveries 27 34 61
-------- -------- ------------
Balance at the end of the period $ 1,875 $ 1,809 $ 1,810
======== ======== ============
Non-performing loans $ 1,723 $ 1,190 840
Non-performing assets 1,811 1,190 911
Non-performing loans to total loans 0.91% 0.64% 0.46%
Non-performing assets to total assets 0.66% 0.45% 0.33%
Allowance for loan losses to total loans 0.99% 0.97% 1.00%
Allowance for loan losses to non-performing loans 108.82% 152.02% 215.48%
- --------------------------------------------------------------------------------
14
The provision for loan losses increased $30,000 or 40.0% to $105,000 for the six
month period ended June 30, 2005 from $75,000 for the same period in the prior
year. Management's evaluation of the loan portfolio, including economic trends,
regulatory considerations and other factors contributed to the recognition of
$105,000 in the provision for loan losses during the six months ended June 30,
2005.
Noninterest income. Noninterest income increased $411,000 or 41.0% to $1.4
million during the six months ended June 30, 2005, compared to $1.0 million
during the same period in the prior year. This increase can be attributed to
increases in customer fees and services charges, commissions earned on financial
services, gains on sales of securities and other noninterest income of $67,000,
$260,000, $50,000 and $41,000, respectively. These increases were offset by a
decrease in the earnings on bank-owned life insurance of $12,000.
The increase in customer fees and services charges of $67,000 was primarily a
result of the new overdraft privilege program, which was implemented in April
2005.
In July 2004 the Corporation entered into an agreement with Blue Vase
Securities, LLC to provide investment advisory services to our customers, and
operates as Farmers National Financial Services. Blue Vase Securities, LLC is a
nation-wide, full-service, independent broker/dealer that offers various
services such as investments, insurance, wealth management, advisory services,
estate and retirement planning and account consolidation. This partnership has
enabled us to provide our customers with financial solutions that extend outside
the Bank's ordinary deposit products and services. The Corporation earns
commissions from providing this service and recognized $260,000 during the six
months ended June 30, 2005.
The increase in other noninterest income of $41,000 or 24.3% can be primarily
attributed to the sale of foreclosed real estate in the first quarter 2005 which
resulted in a $30,000 gain.
Noninterest expense. Noninterest expense increased $459,000 or 11.6% to $4.4
million during the six months ended June 30, 2005, compared to $4.0 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in compensation and employee benefits, premises
and equipment and other noninterest expenses $330,000, $76,000 and $48,000,
respectively.
Compensation and employee benefits expense increased $330,000 or 15.2% to $2.5
million during the six months ended June 30, 2005, compared to $2.2 million for
the same period in the prior year. Normal annual salary and wage adjustments,
increased health insurance costs, higher director's fees and commissions paid to
our financial services representative of $99,000 were the major components of
this increase. Also contributing to the increase was the addition of a new
compliance officer and a new credit analyst in November 2004.
Premises and equipment expense increased $76,000 or 12.6% to $680,000 during the
six months ended June 30, 2005, compared to $604,000 for the same period in the
prior year. This increase can be primarily attributed to increased building and
equipment depreciation expenses, repairs and maintenance and other building and
equipment expenses. Also contributing to the increase was a change in the
estimated useful life of an asset which will be abandoned in the third quarter
2005. Additional depreciation of $27,000 was recorded in June 2005 as a result
of this change and will continue through October 2005 for a total of $108,000.
15
Other noninterest expense increased $48,000 or 4.1% to $1.21 million during the
six months ended June 30, 2005, compared to $1.17 million for the same period in
the prior year. This increase can be attributed primarily to increases in
professional fees, Pennsylvania shares taxes, software depreciation, travel and
entertainment expenses and other expenses. Partially offsetting these increases
were decreases in telephone and communication expenses, Pennsylvania use taxes,
marketing and postage, as discussed below.
o Telephone and communication expenses decreased $104,000 as a result of
the resolution of contract issues related to two telephone vendors
during 2004.
o Postage decreased $11,000 as a result of a new automail system placed
in service in the fourth quarter 2004 which allows us to take
advantage of discounted mail rates on our first class postage.
o Travel and entertainment expenses increased $40,000 as a result of the
increased efforts in our Corporate Banking area and travel associated
with training throughout the organization as well as the increase in
the IRS mileage rate to $.405 in 2005. Also contributing to the
increase in entertainment expenses was our first annual golf outing
hosted by our Corporate Banking department. o Professional fees
increased $77,000 as a result of costs associated with Sarbanes-Oxley
compliance and the resolution of sales and use tax issues.
Provision for income taxes. The provision for income taxes increased $48,000 or
19.1% to $300,000 for the six months ended June 30, 2005, compared to $252,000
for the same period in the prior year due primarily to the increase in the
Corporation's pre-tax earnings base between the first half of 2005 and 2004. The
Corporation's effective tax rate was 18.8% in 2005 compared to 17.8% in 2004.
The difference between the statutory rate of 34% and the Corporation's effective
tax rate is due to tax-exempt income earned on loans, securities and bank-owned
life insurance.
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and amortization and
prepayments of outstanding loans and maturing securities. During the six months
ended June 30, 2005, the Corporation used its sources of funds primarily to fund
loan originations. As of such date, the Corporation had outstanding loan
commitments, including undisbursed loans and amounts available under credit
lines, totaling $15.7 million, and standby letters of credit totaling $577,000.
At June 30, 2005, time deposits amounted to $110.9 million or 47.6% of the
Corporation's total consolidated deposits, including approximately $36.4 million
which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a term borrowing capacity from the FHLB and, to a limited and rare extent,
the sale of loans. At June 30, 2005, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $108.2 million.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely impact its liquidity or
its ability to meet funding needs in the ordinary course of business.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
Market risk for the Corporation consists primarily of interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and paying liabilities are at the Bank, virtually all of the interest rate risk
and liquidity risk lies at the Bank level. The Bank is not subject to currency
exchange risk or commodity price risk, and has no trading portfolio, and
therefore, is not subject to any trading risk. In addition, the Bank does not
participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets. Interest rate risk and
liquidity risk management is performed at the Bank level. Although the Bank has
a diversified loan portfolio, loans outstanding to individuals and businesses
depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management
committee is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability committee is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of the bank's rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Corporation's net interest income is affected
by future changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income. Conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The closer to zero that gap is maintained, generally, the lesser the impact of
market interest rate changes on net interest income.
At June 30, 2005, the Corporation's interest-earning assets maturing or
repricing within one year (assuming immediate repricing for core deposits)
totaled $75.4 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $116.0 million, providing an
excess of interest-bearing liabilities over interest-earning assets of $40.6
million or a negative 14.8% of total assets. At June 30, 2005, the percentage of
the Corporation's assets to liabilities maturing or repricing within one year
was 65.0%.
For more information, see "Market Risk Management" in Exhibit 13 to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2004.
Item 4. 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
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's 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-15(e).
As of the quarter ended June 30, 2005, 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 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.
There have been no significant changes in the Corporation's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date the Corporation completed its evaluation.
17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- -------------------------
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds
- ----------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
(a) The annual meeting of stockholders of the Corporation was held May 18,
2005. Of 1,267,835 common shares eligible to vote, 1,049,171 or 82.8% were
voted in person or by proxy.
(b) The following Class B directors were elected for a three year term expiring
in 2008:
Name Shares For Shares Withheld
---- ----------- ----------------
James M. Crooks 926,375 122,796
Robert L. Hunter 1,044,935 4,236
John B. Mason 1,030,046 19,124
In addition to the above listed individuals, the following persons continue
to serve as directors: Ronald L. Ashbaugh, George W. Freeman, Brian C.
McCarrier, J. Michael King, Mark A. Freemer and David L. Cox.
(c) The recommendation of the Board of Directors to ratify the appointment of
Beard Miller Company LLP as the Corporation's independent auditors, as
described in the proxy statement for the annual meeting was approved with
972,404 shares in favor, 76,332 shares against and 434 shares abstained.
Item 5. Other Information
- -------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
- ----------------
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Principal Financial and Accounting
Officer
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 PFO Certification Pursuant to 18 U.S.C. Section 1350
18
Signatures
- ----------
Pursuant to the requirements 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. AND SUBSIDIARY
Date: August 11, 2005 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: August 11, 2005 By: /s/ Shelly L. Rhoades
--------------------------------------------
Treasurer
(Principal Financial and Accounting Officer)
19