-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LJwoFBMG265+9L91ODzOb3WTn/LkcqaEkEObE1u380cjh7576rvPhPaVBGBryKeL Ly2UhLt3nVOpXpm32KkZNA== 0001157523-05-010099.txt : 20051114 0001157523-05-010099.hdr.sgml : 20051111 20051114161631 ACCESSION NUMBER: 0001157523-05-010099 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCLAIRE FINANCIAL CORP CENTRAL INDEX KEY: 0000858800 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251606091 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18464 FILM NUMBER: 051201746 BUSINESS ADDRESS: STREET 1: 612 MAIN ST CITY: EMLENTON STATE: PA ZIP: 16373 BUSINESS PHONE: 7248672311 MAIL ADDRESS: STREET 1: POST OFFICE BOX D STREET 2: 612 MAIN STREET CITY: EMLENTON STATE: PA ZIP: 16373 10-Q 1 a5019988.txt EMCLAIRE FINANCIAL CORP., 10-Q - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1606091 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 612 Main Street, Emlenton, Pennsylvania 16373 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (724) 867-2311 - -------------------------------------------------------------------------------- (Registrant's telephone number) - -------------------------------------------------------------------------------- (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. - -------------------------------------------------------------------------------- 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 - ------------------------------------- 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) -------------- -------------- -------------- -------------- 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:
- ---------------------------------------------------------------------------------------------------------------- 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: - -------------------------------------------------------------------------------- September 30, December 31, (Dollar Amounts In thousands) 2005 2004 - -------------------------------------------------------------------------------- Mortgage loans: Residential first mortgage $ 66,238 $ 69,310 Home equity 39,617 31,548 Commercial real estate 52,627 48,539 -------------- -------------- 158,482 149,397 Other loans: Commercial business 24,656 23,898 Consumer 8,035 8,090 -------------- -------------- 32,691 31,988 -------------- -------------- Total loans, gross 191,173 181,385 Less allowance for loan losses 1,893 1,810 -------------- -------------- Total loans, net $ 189,280 $ 179,575 ============== ============== - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - ----------------- 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 20 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 EX-31.1 2 a5019988ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)) I, David L. Cox, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this Form 10-Q of Emclaire Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 By: /s/ David L. Cox ------------------------------------- David L. Cox Chairman of the Board, President and Chief Executive Officer 22 EX-31.2 3 a5019988ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 Certification of the Principal Financial and Accounting Officer (Pursuant to Rule 13a-14(a)) I, Shelly L. Rhoades, Principal Financial and Accounting Officer certify that: 1. I have reviewed this Form 10-Q of Emclaire Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 By: /s/ Shelly L. Rhoades ------------------------------------------ Shelly L. Rhoades Treasurer Principal Financial and Accounting Officer 23 EX-32.1 4 a5019988ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Emclaire Financial Corp. (the Corporation) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date here (the Report), I, David L. Cox, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation. /s/ David L. Cox - ----------------- David L. Cox Chief Executive Officer November 14, 2005 EX-32.2 5 a5019988ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 PFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Emclaire Financial Corp. (the Corporation) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date here (the Report), I, Shelly L. Rhoades, Principal Financial and Accounting Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation. /s/ Shelly L. Rhoades - ---------------------- Shelly L. Rhoades Treasurer Principal Financial and Accounting Officer November 14, 2005 -----END PRIVACY-ENHANCED MESSAGE-----