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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 September 30, 2005
Commission File Number: 000-18464
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
incorporation or organization) Identification No.)
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 November 14, 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
September 30, 2005 and December 31, 2004...................................................1
Consolidated Statements of Income for the three and nine
months ended September 30, 2005 and 2004...................................................2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004...................................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three and nine months ended September 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................................19
Item 4. Controls and Procedures...................................................................19
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.........................................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............................20
Item 3. Defaults upon Senior Securities...........................................................20
Item 4. Submission of Matters to a Vote of Security Holders.......................................20
Item 5. Other Information.........................................................................20
Item 6. Exhibits..................................................................................20
Signatures ..........................................................................................21
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
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Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of September 30, 2005 (Unaudited) and December 31, 2004
(Dollar amounts in thousands, except per share data)
September 30, December 31,
2005 2004
--------------- ---------------
Assets
------
Cash and due from banks $ 7,401 $ 7,769
Interest earning deposits with banks 958 6,855
--------------- ---------------
Cash and cash equivalents 8,359 14,624
Securities available for sale 60,030 63,346
Securities held to maturity; fair value of $15 and $16 15 16
Loans held for sale - 386
Loans receivable, net of allowance for loan losses of $1,893 and $1,810 189,280 179,575
Federal bank stocks, at cost 1,882 1,731
Bank-owned life insurance 4,580 4,448
Accrued interest receivable 1,315 1,203
Premises and equipment, net 5,890 5,678
Goodwill 1,422 1,422
Other intangibles 9 38
Prepaid expenses and other assets 1,336 913
--------------- ---------------
Total Assets $ 274,118 $ 273,380
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 41,509 $ 40,511
Interest bearing 187,179 192,363
--------------- ---------------
Total deposits 228,688 232,874
Short term borrowed funds 5,000 -
Long term borrowed funds 15,000 15,000
Accrued interest payable 568 577
Accrued expenses and other liabilities 1,185 1,313
--------------- ---------------
Total Liabilities 250,441 249,764
--------------- ---------------
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 13,332 12,398
Accumulated other comprehensive income 382 1,255
--------------- ---------------
Total Stockholders' Equity 23,677 23,616
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 274,118 $ 273,380
=============== ===============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three and nine months ended September 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Interest and dividend income:
Loans receivable, including fees $ 3,104 $ 2,961 $ 9,119 $ 8,827
Securities:
Taxable 417 360 1,301 990
Exempt from federal income tax 175 175 523 524
Federal bank stocks 14 8 44 29
Deposits with banks 23 17 72 32
--------------- --------------- --------------- ---------------
Total interest and dividend income 3,733 3,521 11,059 10,402
--------------- --------------- --------------- ---------------
Interest expense:
Deposits 1,236 1,129 3,620 3,322
Borrowed funds 169 158 481 475
--------------- --------------- --------------- ---------------
Total interest expense 1,405 1,287 4,101 3,797
--------------- --------------- --------------- ---------------
Net interest income 2,328 2,234 6,958 6,605
Provision for loan losses 40 95 145 170
--------------- --------------- --------------- ---------------
Net interest income after provision for loan losses 2,288 2,139 6,813 6,435
--------------- --------------- --------------- ---------------
Noninterest income:
Fees and service charges 403 282 1,024 836
Commissions on financial services 88 11 348 11
Gains on sales of securities 290 88 510 257
Gain on the sale of loans 2 39 5 37
Earnings on bank-owned life insurance 44 56 144 167
Other 93 100 302 269
--------------- --------------- --------------- ---------------
Total noninterest income 920 576 2,333 1,577
--------------- --------------- --------------- ---------------
Noninterest expense:
Compensation and employee benefits 1,298 1,087 3,800 3,259
Premises and equipment, net 401 315 1,082 919
Intangible amortization expense 8 9 29 25
Other 679 538 1,893 1,704
--------------- --------------- --------------- ---------------
Total noninterest expense 2,386 1,949 6,804 5,907
--------------- --------------- --------------- ---------------
Income before provision for income taxes 822 766 2,342 2,105
Provision for income taxes 159 81 458 333
--------------- --------------- --------------- ---------------
Net income $ 663 $ 685 $ 1,884 $ 1,772
=============== =============== =============== ===============
Basic earnings per share $ 0.52 $ 0.54 $ 1.49 $ 1.40
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 nine months ended September 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the nine months ended
September 30,
----------------------------------
2005 2004
--------------- ---------------
Operating activities:
Net income $ 1,884 $ 1,772
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 658 518
Provision for loan losses 145 170
Amortization of premiums and accretion of discounts, net 88 175
(Gain) on sale of loans (5) (37)
Loans originated for sale (150) (436)
Proceeds from sales of loans held for sale 541 -
(Gains) on sale of securities (510) (257)
Earnings on bank-owned life insurance, net (132) (155)
Amortization of intangible assets and mortgage servicing rights 34 32
Change in accrued interest receivable (112) 79
Change in prepaid expenses and other assets 110 372
Change in accrued interest payable (9) 26
Change in accrued expenses and other liabilities (128) (406)
--------------- ---------------
Net cash from operating activities 2,414 1,853
--------------- ---------------
Investing Activities:
Loan originations and principal collections, net (9,960) 6,971
Available-for-sale securities:
Sales 1,232 704
Maturities, prepayments and calls 5,663 10,303
Purchases (4,458) (21,264)
Held-to-maturity securities:
Maturities, prepayments and calls 1 1
Redemption (purchases) of Federal bank stocks (151) 290
Purchase of customer relationship intangible - (20)
Purchases of premises and equipment (870) (1,281)
--------------- ---------------
Net cash from investing activities (8,543) (4,296)
--------------- ---------------
Financing Activities:
Net (decrease) increase in deposits (4,186) 13,021
Increase (decrease) in overnight borrowed funds 5,000 (5,700)
Dividends paid on common stock (950) (875)
--------------- ---------------
Net cash from financing activities (136) 6,446
--------------- ---------------
Net (decrease) increase in cash equivalents (6,265) 4,003
Cash equivalents at beginning of period 14,624 7,703
--------------- ---------------
Cash equivalents at end of period $ 8,359 $ 11,706
=============== ===============
Supplemental information:
Interest paid $ 4,110 $ 3,771
Income taxes paid 349 232
Supplemental noncash disclosures:
Transfers from loans to foreclosed real estate $ 89 $ -
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three and nine months ended September 30, 2005 and 2004 (Unaudited)
(Dollar amounts in thousands)
For the three months ended For the nine months ended
September 30, September 30,
2005 2004 2005 2004
Balance at beginning of period $ 23,882 $ 22,559 $ 23,616 $ 22,655
Net income 663 685 1,884 1,772
Change in net unrealized gain on available for sale
securities, net of taxes (360) 506 (536) 18
Less reclassification adjustment for gains included
in net income, net of taxes (191) (58) (337) (169)
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Other comprehensive income (loss) (551) 448 (873) (151)
-------------- -------------- -------------- --------------
Total comprehensive income (loss) 112 1,133 1,011 1,621
Dividends declared (317) (291) (950) (875)
---------------- ---------------- ---------------- --------------
Balance at end of period $ 23,677 $ 23,401 $ 23,677 $ 23,401
============== ============== ============== ==============
Common cash dividend per share $ 0.25 $ 0.23 $ 0.75 $ 0.69
============== ============== ============== ==============
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.
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 September 30,
2005 and 2004 amounted to $19,000 and $17,000, respectively. Matching
contributions for the nine months ended September 30, 2005 and 2004
amounted to $56,000 and $50,000, 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 months ended For the nine months ended Year ended
September 30, September 30, December 31,
--------------------------- --------------------------- -------------
(Dollar amounts in thousands) 2005 2004 2005 2004 2004
- ----------------------------------------------------- ------------ ------------ ------------ ------------
Service cost $ 57 $ 41 $ 141 $ 123 $ 158
Interest cost 58 46 160 138 187
Expected return on plan assets (62) (53) (184) (159) (209)
Transition asset (2) (2) (6) (6) (8)
Prior service costs (8) (8) (24) (24) (10)
Recognized net actuarial (gain) loss 18 8 36 24 -
------------ ------------ ------------ ------------ ------------
Net periodic pension cost $ 61 $ 32 $ 123 $ 96 $ 118
============ ============ ============ ============ ============
The expected rate of return on plan assets is 8.50% for the periods ended
September 30, 2005 and 2004. The Corporation contributed $135,000 to its
pension plan for the nine month period ending September 30, 2005.
4. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
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September 30, December 31,
(Dollar Amounts In thousands) 2005 2004
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Mortgage loans:
Residential first mortgage $ 66,238 $ 69,310
Home equity 39,617 31,548
Commercial real estate 52,627 48,539
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158,482 149,397
Other loans:
Commercial business 24,656 23,898
Consumer 8,035 8,090
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32,691 31,988
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Total loans, gross 191,173 181,385
Less allowance for loan losses 1,893 1,810
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Total loans, net $ 189,280 $ 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 September 30, 2005, $180,000 automatically
renews within the next twelve months, $87,000 will expire within the next
twelve months and $310,000 will expire within thirteen to forty-nine
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 September 30, 2005 for guarantees under standby
letters of credit issued is not material.
6. Effect of Recently Issued Accounting Standards
----------------------------------------------
In January 2003, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investors" ("EITF 03-1"), and in March 2004, the
EITF issued an update. EITF 03-1 addresses the meaning of
other-than-temporary impairment and its application to certain debt and
equity securities. EITF 03-1 aids in the determination of impairment of an
investment and gives guidance as to the measurement of impairment loss and
the recognition and disclosures of other-than-temporary investments. EITF
03-1 also provides a model to determine other-than-temporary impairment
using evidence-based judgment about the recovery of the fair value up to
the cost of the investment by considering the severity and duration of the
impairment in relation to the forecasted recovery of the fair value. In
July 2005, FASB adopted the recommendation of its staff to nullify key
parts of EITF 03-1. The staff's recommendations were to nullify the
guidance on the determination of whether an investment is impaired as set
forth in paragraphs 10-18 of Issue 03-1 and not to provide additional
guidance on the meaning of other-than-temporary impairment. Instead, the
staff recommends entities recognize other-than-temporary impairments by
applying existing accounting literature such as paragraph 16 of SFAS 115.
In July 2005, the FASB issued a proposed interpretation of FAS 109,
"Accounting for Income Taxes", to clarify certain aspects of accounting for
uncertain tax positions, including issues related to the recognition and
measurement of those tax positions. If adopted as proposed, the
interpretation would be effective in the fourth quarter of 2005, and any
adjustments required to be recorded as a result of adopting the
interpretation would be reflected as a cumulative effect from a change in
accounting principle. We are currently in the process of determining the
impact of adoption of the interpretation as proposed on our financial
position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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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 nine month periods ended September 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.
7
CHANGES IN FINANCIAL CONDITION
Total assets increased $738,000 to $274.1 million at September 30, 2005 from
$273.4 million at December 31, 2004. This increase was primarily due to an
increase in loans receivable of $9.7 million. Partially offsetting this increase
were decreases in cash and cash equivalents and securities of $6.3 million and
$3.3 million, respectively.
Cash and cash equivalents decreased $6.3 million or 42.8% to $8.4 million at
September 30, 2005 from $14.6 million at December 31, 2004 primarily to fund the
increase in loans receivable of $9.7 million.
Loans held for sale decreased $386,000 or 100.0% to $0 at September 30, 2005
from $386,000 at December 31, 2004. During 2005, the Corporation originated
$150,000 in additional student loans. In June, the Corporation sold the entire
student loan portfolio of $536,000 resulting in a gain of $5,000.
Loans receivable increased $9.7 million or 5.4% to $189.3 million at September
30, 2005 from $179.6 million at December 31, 2004 due primarily to increases in
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 loan
campaigns put forth during the year, offering rates from 4.99% to 5.24% for
qualified individuals.
Stockholders' equity increased $61,000 to $23.7 million at September 30, 2005
from $23.6 million at December 31, 2004. This increase was the result of net
income of $1.9 million offset by dividends declared of $950,000 and a decrease
in accumulated other comprehensive income of $873,000. The decrease in
accumulated other comprehensive income was primarily due to a decrease in the
market value of available for sale securities.
RESULTS OF OPERATIONS
Comparison of Results for the Three Month Periods Ended September 30, 2005 and
2004
General. Net income decreased $22,000 or 3.2% to $663,000 for the three months
ended September 30, 2005 from $685,000 for the same period in 2004. This
decrease was a result of increases in noninterest expense and the provision for
income taxes of $437,000 and $78,000, respectively, offset by increases in net
interest income and noninterest income of $94,000 and $344,000, respectively,
and the decrease in the provision for loan losses of $55,000.
Net interest income. Net interest income on a tax equivalent basis increased
$92,000 or 3.9% to $2.4 million for the three months ended September 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 $210,000 offset by an increase
in interest expense of $118,000.
Interest income. Interest income on a tax equivalent basis increased $210,000 or
5.8% to $3.8 million for the three months ended September 30, 2005, compared to
$3.6 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 $6.2 million or 2.5% and a 17 basis point increase in the interest
rate on average interest-earning assets to 5.95% during the three months ended
September 30, 2005, compared to 5.78% for the same period in the prior year.
The average balance of securities increased $4.2 million or 7.3% to $61.8
million for the three months ended September 30, 2005, compared to $57.6 million
for the same period in the prior year. The increase in volume contributed an
additional $46,000 to interest income. The increase in the average balance of
securities was a result of investing deployable funds into US government
agencies and mortgage-backed securities to supplement loan originations.
8
The average balance of interest-earning cash equivalents decreased $1.9 million
or 29.7% to $4.6 million for the three months ended September 30, 2005, compared
to $6.5 million for the same period in the prior year. The yield on average
interest-earning cash equivalents increased 169 basis points to 3.22% during the
three months ended September 30, 2005, compared to 1.53% 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 $15,000 to interest income. The decrease
in the average balance was primarily due to funding requirements for loan
originations.
The average balance of loans receivable increased $3.9 million or 2.1% to $189.5
million for the three months ended September 30, 2005, compared to $185.7
million for the same period in the prior year primarily due to increases in
commercial mortgages and business loans and home equity loans. The yield on
average loans receivable increased 15 basis points to 6.57% during the three
months ended September 30, 2005, compared to 6.42% for the same period in the
prior year. The increase in the average yield was primarily due to increased
originations of higher yielding commercial loans and the origination of loans
with higher yields relative to portfolio loans as a result of the recent
increase in interest rates. The increase in volume and yield contributed an
additional $63,000 and $80,000, respectively, to interest income.
Interest expense. Interest expense increased $118,000 or 9.2% to $1.4 million
for the three months ended September 30, 2005, compared to $1.3 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 overnight borrowed funds of
$1.0 million and the increase in the interest rate on average interest-bearing
liabilities of 22 basis points to 2.72% for the three months ended September 30,
2005 from 2.50% for the same period in the prior year. The average cost of
deposits was 2.59% and 2.37% for the three months ended September 30, 2005 and
2004, respectively. The increase in rate and volume of interest-bearing
liabilities contributed an additional $110,000 and $8,000, respectively, to
interest income.
9
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 September 30,
--------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $ 182,540 $ 3,025 6.58% $ 178,302 $ 2,878 6.42%
Loans, tax exempt 7,008 112 6.32% 7,388 117 6.32%
----------- ----------- ----------- -----------
Total Loans
Receivable 189,548 3,137 6.57% 185,690 2,995 6.42%
----------- ----------- ----------- -----------
Securities, taxable 46,262 417 3.58% 42,262 360 3.39%
Securities, tax exempt 15,513 247 6.33% 15,291 248 6.44%
----------- ----------- ----------- -----------
Total Securities 61,775 664 4.27% 57,553 608 4.20%
----------- ----------- ----------- -----------
Interest-earning cash equivalents 2,922 23 3.12% 4,794 17 1.41%
Federal bank stocks 1,639 14 3.39% 1,690 8 1.88%
----------- ----------- ----------- -----------
Total Interest-Earning Cash Equivalents 4,561 37 3.22% 6,484 25 1.53%
----------- ----------- ----------- -----------
Total interest-earning assets 255,884 3,838 5.95% 249,727 3,628 5.78%
Cash and due from banks 6,952 7,744
Other noninterest-earning assets 12,376 12,263
----------- -----------
Total Assets $ 275,212 $ 269,734
=========== ===========
Interest-bearing
liabilities:
- ------------------------
Interest-bearing demand deposits $ 78,998 $ 153 0.77% $ 77,829 $ 106 0.54%
Time deposits 110,033 1,083 3.90% 111,698 1,023 3.64%
----------- ----------- ----------- -----------
Total Interest-Bearing Deposits 189,031 1,236 2.59% 189,527 1,129 2.37%
----------- ----------- ----------- -----------
Borrowed funds, term 15,000 158 4.18% 15,000 158 4.19%
Borrowed funds,
overnight 1,028 11 4.25% - - 0.00%
----------- ----------- ----------- -----------
Total Borrowed Funds 16,028 169 4.18% 15,000 158 4.19%
----------- ----------- ----------- -----------
Total interest-bearing liabilities 205,059 1,405 2.72% 204,527 1,287 2.50%
Noninterest-bearing demand deposits 43,107 - - 40,168 -
----------- ----------- ----------- ------------
Funding and cost of funds 248,166 1,405 2.25% 244,695 1,287 2.09%
Other noninterest-bearing liabilities 2,549 2,002
----------- -----------
Total Liabilities 250,715 246,697
Stockholders' Equity 24,497 23,037
----------- -----------
Total Liabilities and Stockholders' Equity $ 275,212 $ 269,734
=========== ------------ =========== ------------
Net interest income $ 2,433 $ 2,341
=========== ===========
Interest rate spread (difference between 3.23% 3.28%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.77% 3.73%
income as a percentage of average
interest-earning
assets)
- -------------------------------------------------------------------------------------------------------------------------
10
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 September 30,
2005 versus 2004
Increase (Decrease) due to
------------------------------------------
(Dollar amounts in thousands) Volume Rate Total
- --------------------------------------------------------------------------------------------
Interest income:
Loans $ 63 $ 79 $ 142
Securities 45 11 56
Interest-earning cash equivalents (9) 15 6
Federal bank stocks - 6 6
------------ ------------ -----------
Total interest-earning assets 99 111 210
------------ ------------ -----------
Interest expense:
Deposits (3) 110 107
Borrowed funds 11 - 11
------------ ------------ -----------
Total interest-bearing liabilities 8 110 118
------------ ------------ -----------
Net interest income $ 91 $ 1 $ 92
============ ============ ===========
- --------------------------------------------------------------------------------------------
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 quarters ended September 30, 2005 and 2004 is as follows:
At or for the three months ended
September 30,
--------------------------------------------
(Dollar amounts in thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,875 $ 1,809
Provision for Loan Losses 40 95
Charge-Offs (32) (196)
Recoveries 10 8
-------------------- --------------------
Balance at the end of the period $ 1,893 $ 1,716
==================== ====================
Non-performing loans $ 1,608 $ 1,244
Non-performing assets 1,705 1,314
Non-performing loans to total loans 0.84% 0.67%
Non-performing assets to total assets 0.62% 0.49%
Allowance for loan losses to total loans 0.99% 0.93%
Allowance for loan losses to non-performing loans 117.72% 137.94%
- ---------------------------------------------------------------------------------------------------
11
The provision for loan losses decreased $55,000 to $40,000 for the three month
period ended September 30, 2005 from $95,000 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
$40,000 in the provision for loan losses during the three months ended September
30, 2005.
Noninterest income. Noninterest income increased $344,000 or 59.7% to $920,000
during the three months ended September 30, 2005, compared to $576,000 during
the same period in the prior year. This increase can be attributed to increases
in customer fees and service charges, commissions earned on financial services
and gains on the sale of securities of $121,000, $77,000 and $202,000,
respectively. Offsetting this increase in noninterest income were decreases in
the gains on the sale of loans, earnings on bank-owned life insurance and other
noninterest income of $37,000, $12,000 and $7,000, respectively.
The increase in customer fees and service charges of $121,000 or 42.9% was
primarily a result of the new overdraft privilege program, which was implemented
in April 2005.
The increase in commissions earned on financial services of $77,000 to $88,000
during the three months ended September 30, 2005, compared to $11,000 during the
same period in the prior year was the result of our efforts made in providing
investment advisory services to our customers. These services consist of
investments, insurance, wealth management, advisory services, estate and
retirement planning and account consolidation.
The increase in the gains on the sale of securities of $202,000 to $290,000
during the three months ended September 30, 2005, compared to $88,000 during the
same period in the prior year was the result of the sale of marketable equity
securities. The sale of securities resulted from management's change in
philosophy of investing in large regional banks to becoming shareholders in
local community financial institutions.
Noninterest expense. Noninterest expense increased $437,000 or 22.4% to $2.4
million during the three months ended September 30, 2005, compared to $1.9
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 $211,000, $86,000 and
$141,000, respectively.
Compensation and employee benefits expense increased $211,000 or 19.4% to $1.3
million during the three months ended September 30, 2005, compared to $1.1
million for the same period in the prior year. Normal annual salary and wage
adjustments, additional wages paid to summer part-time employees, increased
health insurance costs, higher director's fees and commissions paid to a
financial services representative of $44,000 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 and additional accruals made
for the Bank's incentive program and pension plan of $77,000 and $30,000,
respectively.
Premises and equipment expense increased $86,000 or 27.3% to $401,000 during the
three months ended September 30, 2005, compared to $315,000 for the same period
in the prior year. This increase can be primarily attributed to a change in the
estimated useful life of an asset which will be replaced in the fourth quarter
2005. Additional depreciation of $81,000 was recognized during the third quarter
2005 as a result of this change. Another $27,000 of depreciation associated with
this asset will be recorded in October 2005 for a total of $135,000 recognized
during the year. Also contributing to this increase were increases in building
and equipment depreciation expenses, utilities, repairs and maintenance and
other building and equipment expenses.
Other noninterest expense increased $141,000 or 26.2% to $679,000 during the
three months ended September 30, 2005, compared to $538,000 for the same period
in the prior year. This increase can be attributed primarily to increases in
telephone and communications, travel and entertainment expenses and other
noninterest expenses. Partially offsetting these increases were decreases in
marketing expenses and printing and office supplies between the two periods, as
discussed below.
12
o Telephone and communication expenses increased $48,000 as a result of the
recognition of refunds associated to the resolution of contract issues
related to two telephone vendors during the third quarter 2004.
o Travel and entertainment expenses increased $9,000 as a result of the
increased efforts in the Corporate Banking area and travel associated with
training throughout the organization as well as the increase in the IRS
mileage rate in 2005.
Provision for income taxes. The provision for income taxes increased $78,000 or
96.3% to $159,000 for the three months ended September 30, 2005, compared to
$81,000 for the same period in the prior year due primarily to an increase in
the Corporation's pre-tax earnings base between the third quarter of 2005 and
2004. Also contributing to the increase was the increase in the effective tax
rate to 19.3% in 2005 from 10.6% in 2004. The effective tax rate in 2004 was
lower as a result of the generation of general business credits related to the
renovation of our main headquarters. There were no general business credits
generated in 2005. 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 Nine Month Periods Ended September 30, 2005 and
2004
General. Net income increased $112,000 or 6.3% to $1.9 million for the nine
months ended September 30, 2005 from $1.8 million for the same period in 2004.
This increase was a result of increases in net interest income and noninterest
income of $353,000 and $756,000, respectively, and the decrease in the provision
for loan losses of $25,000. Offsetting the increase in net income were increases
in the provision for income taxes and noninterest expense of $125,000 and
$897,000, respectively.
Net interest income. Net interest income on a tax equivalent basis increased
$347,000 or 5.0% to $7.3 million for the nine months ended September 30, 2005
from $6.9 million for the same period in 2004. This net increase can be
attributed to an increase in interest income of $651,000 offset by an increase
in interest expense of $304,000.
Interest income. Interest income on a tax equivalent basis increased $651,000 or
6.1% to $11.4 million for the nine months ended September 30, 2005, compared to
$10.7 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 $9.2 million or 3.5% as well as a 13 basis point increase in the
interest rate on average interest-earning assets to 5.95% during the nine months
ended September 30, 2005, compared to 5.82% for the same period in the prior
year.
The average balance of securities increased $9.9 million or 18.4% to $63.7
million for the nine months ended September 30, 2005, compared to $53.8 million
for the same period in the prior year. The increase in volume contributed an
additional $319,000 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 $147,000 or
2.9% to $5.2 million for the nine months ended September 30, 2005, compared to
$5.1 million for the same period in the prior year. The increase in volume
contributed an additional $3,000 to interest income. The yield on average
interest-earning cash equivalents also increased 136 basis points to 2.96%
during the nine months ended September 30, 2005, compared to 1.60% 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 $34,000 to interest income.
Offsetting the increase in average interest-earning assets was a decrease in the
average balance of loans receivable of $849,000 to $186.5 million for the nine
months ended September 30, 2005, compared to $187.4 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 6.61% during the nine months ended
September 30, 2005, compared to 6.37% during the same period in the prior year.
The increase in the yield contributed an additional $328,000 to interest income.
13
During the second quarter of 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 6.49% and 3.72%,
respectively, during the nine month period ending September 30, 2005 compared to
6.37% and 3.76%, respectively, during the same period in the prior year.
Interest expense. Interest expense increased $304,000 or 8.0% to $4.1 million
for the nine months ended September 30, 2005, compared to $3.8 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 $190.8 million
during the nine months ended September 30, 2005, compared to $186.3 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 $15.4 million during the nine months ended September 30, 2005, compared
to $15.7 million during the same period in the prior year. The interest rate on
average interest-bearing liabilities was 2.66% and 2.51% for the nine months
ended September 30, 2005 and 2004, respectively. The average cost of deposits
was 2.54% and 2.38% for the nine months ended September 30, 2005 and 2004,
respectively. The increase in rate is primarily a result of $13.8 million of
step up certificates of deposit that were originally opened in 2001 and 2002 and
have reached that final step in the product cycle. The average yield of these
certificates is 6.02%. They are scheduled to mature throughout 2006.
14
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.
Nine months ended September 30,
--------------------------------------------------------------------------------
2005 2004
--------------------------------------- ---------------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans, taxable $ 179,402 $ 8,882 6.62% $ 179,929 $ 8,578 6.37%
Loans, tax exempt 7,104 335 6.30% 7,426 352 6.33%
------------ ------------ ------------ ------------ ------------ ------------
Total Loans Receivable 186,506 9,217 6.61% 187,355 8,930 6.37%
------------ ------------ ------------ ------------ ------------ ------------
Securities, taxable 48,246 1,301 3.61% 38,495 990 3.44%
Securities, tax exempt 15,480 740 6.39% 15,330 742 6.46%
------------ ------------ ------------ ------------ ------------ ------------
Total Securities 63,726 2,041 4.28% 53,825 1,732 4.30%
------------ ------------ ------------ ------------ ------------ ------------
Interest-earning cash equivalents 3,657 72 2.63% 3,331 32 1.28%
Federal bank stocks 1,584 44 3.71% 1,763 29 2.20%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest-Earning Cash Equivalents 5,241 116 2.96% 5,094 61 1.60%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 255,473 11,374 5.95% 246,274 10,723 5.82%
Cash and due from banks 7,466 7,007
Other noninterest-earning assets 12,270 11,904
------------ ------------
Total assets $ 275,209 $ 265,185
============ ============
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 79,977 $ 434 0.73% $ 76,373 $ 318 0.56%
Time deposits 110,849 3,186 3.84% 109,894 3,004 3.65%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest-Bearing Deposits 190,826 3,620 2.54% 186,267 3,322 2.38%
------------ ------------ ------------ ------------ ------------ ------------
Borrowed funds, term 15,000 470 4.19% 15,000 470 4.19%
Borrowed funds, overnight 358 11 4.11% 672 5 0.99%
------------ ------------ ------------ ------------ ------------ ------------
Total Borrowed Funds 15,358 481 4.19% 15,672 475 4.05%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 206,184 4,101 2.66% 201,939 3,797 2.51%
Noninterest-bearing demand deposits 42,249 - - 38,326 - -
------------ ------------ ------------ ------------ ------------ ------------
Funding and cost of funds 248,433 4,101 2.21% 240,265 3,797 2.11%
Other noninterest-bearing liabilities 2,551 2,016
------------ ------------
Total liabilities 250,984 242,281
Stockholders' equity 24,225 22,904
------------ ------------
Total liabilities and stockholders' equity $ 275,209 $ 265,185
============ ------------ ============ ------------
Net interest income $ 7,273 $ 6,926
============ ============
Interest rate spread (difference between 3.29% 3.31%
============ ============
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.81% 3.76%
============ ============
income as a percentage of average
interest-earning assets)
15
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.
Nine months ended September 30,
2005 versus 2004
Increase (Decrease) due to
----------------------------------------------
(Dollar amounts in thousands) Volume Rate Total
-----------------------------------------------
Interest income:
Loans $ (41) $ 328 $ 287
Securities 317 (8) 309
Interest-earning cash equivalents 3 37 40
Federal bank stocks (3) 18 15
------------- ------------- -------------
Total interest-earning assets 276 375 651
------------- ------------- -------------
Interest expense:
Deposits 83 215 298
Borrowed funds (10) 16 6
------------- ------------- -------------
Total interest-bearing liabilities 73 231 304
------------- ------------- -------------
Net interest income $ 203 $ 144 $ 347
============= ============= =============
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 nine months ended September 30, 2005 and 2004 is as follows:
- --------------------------------------------------------------------------------------------------------
At or for the
At or for the nine months ended year ended
September 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 145 170 290
Charge-Offs (99) (273) (318)
Recoveries 37 42 61
--------------- --------------- ---------------
Balance at the end of the period $ 1,893 $ 1,716 $ 1,810
=============== =============== ===============
Non-performing loans $ 1,608 $ 1,244 840
Non-performing assets 1,705 1,314 911
Non-performing loans to total loans 0.84% 0.67% 0.46%
Non-performing assets to total assets 0.62% 0.49% 0.33%
Allowance for loan losses to total loans 0.99% 0.93% 1.00%
Allowance for loan losses to non-performing loans 117.72% 137.94% 215.48%
- --------------------------------------------------------------------------------------------------------
16
The provision for loan losses decreased $25,000 or 14.7% to $145,000 for the
nine month period ended September 30, 2005 from $170,000 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 $145,000 in the provision for loan losses during the nine months
ended September 30, 2005.
Noninterest income. Noninterest income increased $756,000 or 47.9% to $2.3
million during the nine months ended September 30, 2005, compared to $1.6
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 $188,000, $337,000, $253,000 and $33,000, respectively. These
increases were offset by decreases in the gains on the sale of loans and
earnings on bank-owned life insurance of $32,000 and $23,000, respectively.
The increase in customer fees and services charges of $188,000 or 22.5% 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 the Bank to provide 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 $348,000 during the nine
months ended September 30, 2005 and $11,000 during the same period in the prior
year.
The increase in the gains on the sale of securities of $253,000 to $510,000
during the nine months ended September 30, 2005, compared to $257,000 during the
same period in the prior year was the result of the sale of marketable equity
securities. The sale of securities resulted from management's change in
philosophy of investing in large regional banks to becoming shareholders in
local community financial institutions.
The increase in other noninterest income of $33,000 or 12.3% 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 $897,000 or 15.2% to $6.8
million during the nine months ended September 30, 2005, compared to $5.9
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 of $541,000, $163,000 and
$189,000, respectively.
Compensation and employee benefits expense increased $541,000 or 16.6% to $3.8
million during the nine months ended September 30, 2005, compared to $3.3
million for the same period in the prior year. Normal annual salary and wage
adjustments, additional wages paid to summer part-time employees, increased
health insurance costs, higher director's fees and commissions paid to a
financial services representative of $144,000 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 and additional accruals made
for the Bank's incentive program and pension plan of $126,000 and $30,000,
respectively.
Premises and equipment expense increased $163,000 or 17.7% to $1.1 million
during the nine months ended September 30, 2005, compared to $919,000 for the
same period in the prior year. This increase can be primarily attributed to a
change in the estimated useful life of an asset which will be replaced in the
fourth quarter 2005. Additional depreciation related to this asset of $108,000
was recorded during the nine months ended September 30, 2005 as a result of this
change and will continue through October 2005 for a total expense of $135,000.
Also contributing to this increase were increases in building and equipment
depreciation expenses, utilities, repairs and maintenance and other building and
equipment expenses.
17
Other noninterest expense increased $189,000 or 11.1% to $1.9 million during the
nine months ended September 30, 2005, compared to $1.7 million for the same
period in the prior year. This increase can be attributed primarily to increases
in professional fees, software depreciation, travel and entertainment expenses
and other noninterest 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 $56,000 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 first class postage.
o Travel and entertainment expenses increased $49,000 as a result of the
increased efforts in the Corporate Banking area and travel associated
with training throughout the organization as well as the increase in
the IRS mileage rate in 2005. Also contributing to the increase in
entertainment expenses was the first annual golf outing hosted by the
Corporate Banking department in the second quarter of 2005.
o Professional fees increased $76,000 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 $125,000 or
37.5% to $458,000 for the nine months ended September 30, 2005, compared to
$333,000 for the same period in the prior year due primarily to the increase in
the Corporation's pre-tax earnings base between the periods ending September 30,
2005 and 2004. Also contributing to the increase was the increase in the
effective tax rate to 19.6% in 2005 compared to 15.8% in 2004. The effective tax
rate in 2004 was lower as a result of the generation of general business credits
related to the renovation of our main headquarters. There were no general
business credits generated in 2005. 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 nine months
ended September 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 $18.1 million, and standby letters of credit totaling $577,000.
At September 30, 2005, time deposits amounted to $110.6 million or 48.3% of the
Corporation's total consolidated deposits, including approximately $43.7 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 September 30, 2005, the Corporation's borrowing capacity
with the FHLB, net of funds borrowed, was $111.5 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.
18
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.
Based on certain assumptions provided by a federal regulatory agency, which
Management believes most accurately represents the sensitivity of the
Corporation's assets and liabilities to interest rate changes, at September 30,
2005, the Corporation's interest-earning assets maturing or repricing within one
year totaled $78.1 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $82.6 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $4.5 million or
a negative 1.7% of total assets. At September 30, 2005, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
94.6%.
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 September 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.
19
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.
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 Securities and Use of Proceeds
- --------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
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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
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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: November 14, 2005 By: /s/ David L. Cox
-----------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: November 14, 2005 By: /s/ Shelly L. Rhoades
-----------------------------------------------
Treasurer
(Principal Financial and Accounting Officer)
21