--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-18464
---------
EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
612 Main Street, Emlenton, Pennsylvania 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer [] Accelerated filer [] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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 13, 2006.
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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, 2006 and December 31, 2005..................................................................1
Consolidated Statements of Income for the three and nine
months ended September 30, 2006 and 2005..................................................................2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2006 and 2005..................................................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three and nine months ended September 30, 2006 and 2005....................................4
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................21
Item 4. Controls and Procedures..................................................................................21
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings........................................................................................22
Item 1A. Risk Factors.............................................................................................22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................22
Item 3. Defaults upon Senior Securities..........................................................................22
Item 4. Submission of Matters to a Vote of Security Holders......................................................22
Item 5. Other Information........................................................................................22
Item 6. Exhibits.................................................................................................22
Signatures .........................................................................................................23
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Interim Financial Statements
-------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of September 30, 2006 (Unaudited) and December 31, 2005
(Dollar amounts in thousands, except per share data)
September 30, December 31,
2006 2005
----------------- ----------------
Assets
------
Cash and due from banks $ 7,020 $ 9,399
Interest-earning deposits with banks 472 968
----------------- ----------------
Cash and cash equivalents 7,492 10,367
Securities available for sale, at fair value 52,582 56,289
Securities held to maturity; fair value of $0 and $14 - 15
Loans held for sale 2,400 -
Loans receivable, net of allowance for loan losses of $1,985 and $1,869 214,961 192,526
Federal bank stocks, at cost 2,335 1,773
Bank-owned life insurance 4,748 4,623
Accrued interest receivable 1,472 1,271
Premises and equipment, net 6,962 6,123
Goodwill 1,422 1,422
Deferred tax asset 451 375
Prepaid expenses and other assets 660 733
----------------- ----------------
Total Assets $ 295,485 $ 275,517
================= ================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 43,223 $ 44,044
Interest-bearing 195,821 186,459
----------------- ----------------
Total deposits 239,044 230,503
Short-term borrowed funds 500 4,500
Long-term borrowed funds 30,000 15,000
Accrued interest payable 747 607
Accrued expenses and other liabilities 923 1,292
----------------- ----------------
Total Liabilities 271,214 251,902
----------------- ----------------
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 14,532 13,678
Accumulated other comprehensive loss (224) (26)
----------------- ----------------
Total Stockholders' Equity 24,271 23,615
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 295,485 $ 275,517
================= ================
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, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- ------------------------------
2006 2005 2006 2005
-------------- --------------- -------------- --------------
Interest and dividend income:
Loans receivable, including fees $ 3,670 $ 3,104 $ 10,166 $ 9,119
Securities:
Taxable 352 417 1,103 1,301
Exempt from federal income tax 176 175 523 523
Federal bank stocks 28 14 68 44
Deposits with banks 14 23 55 72
-------------- --------------- -------------- --------------
Total interest and dividend income 4,240 3,733 11,915 11,059
-------------- --------------- -------------- --------------
Interest expense:
Deposits 1,530 1,236 4,293 3,620
Borrowed funds 324 169 658 481
-------------- --------------- -------------- --------------
Total interest expense 1,854 1,405 4,951 4,101
-------------- --------------- -------------- --------------
Net interest income 2,386 2,328 6,964 6,958
Provision for loan losses 90 40 168 145
-------------- --------------- -------------- --------------
Net interest income after provision for loan losses 2,296 2,288 6,796 6,813
-------------- --------------- -------------- --------------
Noninterest income:
Fees and service charges 387 403 1,122 1,024
Commissions on financial services 101 88 316 348
Gains on securities 134 290 376 510
Gain on the sale of loans 9 2 9 5
Earnings on bank-owned life insurance (BOLI) 53 44 144 144
Other 109 93 324 302
-------------- --------------- -------------- --------------
Total noninterest income 793 920 2,291 2,333
-------------- --------------- -------------- --------------
Noninterest expense:
Compensation and employee benefits 1,391 1,298 3,988 3,800
Premises and equipment 387 401 1,140 1,082
Intangible amortization expense 2 8 7 29
Other 485 679 1,598 1,893
-------------- --------------- -------------- --------------
Total noninterest expense 2,265 2,386 6,733 6,804
-------------- --------------- -------------- --------------
Income before provision for income taxes 824 822 2,354 2,342
Provision for income taxes 132 159 474 458
-------------- --------------- -------------- --------------
Net income $ 692 $ 663 $ 1,880 $ 1,884
============== =============== ============== ==============
Basic earnings per share $ 0.55 $ 0.52 $ 1.48 $ 1.49
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, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands)
For the nine months ended
September 30,
-----------------------------
2006 2005
------------- -------------
Operating Activities:
Net income $ 1,880 $ 1,884
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of premises and equipment 557 658
Provision for loan losses 168 145
Amortization of premiums and accretion of discounts, net 27 88
Gain on sale of loans (9) (5)
Gains on sale of securities available for sale (376) (510)
Earnings on bank-owned life insurance, net (125) (132)
Increase in accrued interest receivable (201) (112)
Decrease in prepaid expenses and other assets 119 144
Increase (decrease) in accrued interest payable 140 (9)
Decrease in accrued expenses and other liabilities (369) (128)
------------- -------------
Net cash provided by operating activities 1,811 2,023
------------- -------------
Investing Activities:
Loan originations and principal collections, net (26,049) (10,110)
Proceeds from the sale of loans held for sale 1,016 541
Available-for-sale securities:
Sales 814 1,232
Maturities, repayments and calls 4,714 5,663
Purchases (1,753) (4,458)
Held-to-maturity securities:
Maturities, repayments and calls 15 1
Purchase of Federal bank stocks (562) (151)
Purchase of premises and equipment (1,396) (870)
------------- -------------
Net cash used in investing activities (23,201) (8,152)
------------- -------------
Financing Activities:
Net increase (decrease) in deposits 8,542 (4,186)
Increase in borrowed funds 11,000 5,000
Dividends paid on common stock (1,027) (950)
------------- -------------
Net cash provided by (used in) financing activities 18,515 (136)
------------- -------------
Net decrease in cash and cash equivalents (2,875) (6,265)
Cash and cash equivalents at beginning of period 10,367 14,624
------------- -------------
Cash and cash equivalents at end of period $ 7,492 $ 8,359
============= =============
Supplemental information:
Interest paid $ 4,811 $ 4,110
Income taxes paid 501 349
Supplemental noncash disclosures:
Transfers from loans to foreclosed real estate $ 20 $ 89
Transfer of loans receivable to loans held for sale 3,407 150
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, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------- -------------------------------
2006 2005 2006 2005
--------------- --------------- ------------- -------------
Balance at beginning of period $ 23,480 $ 23,882 $ 23,615 $ 23,616
Net income 692 663 1,880 1,884
Change in net unrealized gains (losses) on available
for sale securities, net of taxes 529 (360) 51 (536)
Less reclassification adjustment for gains included
in net income, net of taxes (88) (191) (248) (337)
--------------- --------------- ------------- -------------
Other comprehensive income (loss) 441 (551) (197) (873)
--------------- --------------- ------------- -------------
Total comprehensive income 1,133 112 1,683 1,011
Dividends declared (342) (317) (1,027) (950)
--------------- --------------- ------------- -------------
Balance at end of period $ 24,271 $ 23,677 $ 24,271 $ 23,677
=============== =============== ============= =============
Common cash dividend per share $ 0.27 $ 0.25 $ 0.81 $ 0.75
=============== =============== ============= =============
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 mortgages, 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 consolidated 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, 2005, as contained in the Corporation's 2005
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.
5
3. Securities.
The Corporation's securities as of the respective dates are summarized
as follows:
------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) cost gains losses value
------------------------------------------------------------------------------------------------------------------------------
Available for sale:
-------------------
September 30, 2006:
U.S. Government agencies and related entities $ 32,353 $ - $ (671) $ 31,682
Mortgage-backed securities 2,570 - (129) 2,441
Municipal securities 14,687 629 - 15,316
Corporate securities - - - -
Equity securities 3,310 36 (203) 3,143
------------- ------------- ------------- -------------
$ 52,920 $ 665 $ (1,003) $ 52,582
============= ============= ============= =============
December 31, 2005:
U.S. Government agencies and related entities $ 34,353 $ - $ (818) $ 33,535
Mortgage-backed securities 3,046 - (124) 2,922
Municipal securities 14,685 664 - 15,349
Corporate securities 2,249 4 (4) 2,249
Equity securities 1,995 383 (144) 2,234
------------- ------------- ------------- -------------
$ 56,328 $ 1,051 $ (1,090) $ 56,289
============= ============= ============= =============
Held to maturity:
-----------------
September 30, 2006:
Mortgage-backed securities $ - $ - $ - $ -
------------- ------------- ------------- -------------
$ - $ - $ - $ -
============= ============= ============= =============
December 31, 2005:
Mortgage-backed securities $ 15 $ - $ (1) $ 14
------------- ------------- ------------- -------------
$ 15 $ - $ (1) $ 14
============= ============= ============= =============
------------------------------------------------------------------------------------------------------------------------------
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) 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate:
Residential first mortgages $ 65,034 $ 66,011
Home equity loans and lines of credit 47,395 39,933
Commercial real estate 61,732 52,990
--------------------- ---------------------
174,161 158,934
Other loans:
Commercial business 34,964 27,732
Consumer 7,821 7,729
--------------------- ---------------------
42,785 35,461
--------------------- ---------------------
Total loans, gross 216,946 194,395
Less allowance for loan losses 1,985 1,869
--------------------- ---------------------
Total loans, net $ 214,961 $ 192,526
===================== =====================
-----------------------------------------------------------------------------------------------------------------------------
6
5. Deposits.
The Corporation's deposits as of the respective dates are summarized as
follows:
-----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Type of accounts Amount % Amount %
--------------------------------------------------------------------------------- ---------------------------------------
Noninterest-bearing deposits $43,223 18.1% $44,044 19.1%
Interest-bearing demand deposits 72,732 30.4% 74,067 32.1%
Time deposits 123,089 51.5% 112,392 48.8%
------------------ ----------------- ------------------ ------------------
$239,044 100.0% $230,503 100.0%
================== ================= ================== ==================
-----------------------------------------------------------------------------------------------------------------------------
6. 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, 2006, $76,000
automatically renews within the next twelve months, $308,000 will
expire within the next twelve months and $176,000 will expire within
thirteen to thirty-seven 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 payments 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, 2006 for guarantees under standby letters
of credit issued is not material.
7. 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, 2006 and 2005 amounted to $21,000 and $19,000,
respectively. Matching contributions for the nine months ended
September 30, 2006 and 2005 amounted to $63,000 and $56,000,
respectively.
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.
7
7. Employee Benefit Plans (continued).
The components of the periodic pension cost are as follows:
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended Year ended
September 30, September 30, December 31,
------------------------------------------- --------------------------------- --------------
(Dollar amounts in thousands) 2006 2005 2006 2005 2005
------------------------------------------------------- --------------------- ------------------- ---------------- --------------
Service cost $ 56 $ 57 $ 160 $ 141 $ 188
Interest cost 62 58 178 160 214
Expected return on plan assets (69) (62) (201) (184) (246)
Transition asset (2) (2) (6) (6) (8)
Prior service costs (7) (8) (23) (24) 19
Recognized net actuarial (gain) loss 23 18 47 36 -
------------------- --------------------- ------------------- --------------- --------------
Net periodic pension cost $ 63 $ 61 $ 155 $ 123 $ 167
=================== ===================== =================== =============== ==============
------------------------------------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets was 8.50% for the periods
ended September 30, 2006 and 2005. The Corporation contributed $280,000
to its pension plan for the 2006 plan year during the quarter ended
September 30, 2006.
8. Effect of Recently Issued Accounting Standards.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140" ("SFAS
156"). SFAS 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value,
if practicable. The statement permits, but does not require, the
subsequent measurement of servicing assets and servicing liabilities at
fair value. SFAS 156 is effective as of the beginning of an entity's
first fiscal year that begins after September 15, 2006, which for the
Corporation will be as of the beginning of fiscal 2007. The Corporation
does not believe that the adoption of SFAS 156 will have a significant
effect on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes." The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's
financial statements in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Specifically, the pronouncement prescribes a recognition threshold and
a measurement attributable for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for
interim periods, disclosure and transition of uncertain tax positions.
The interpretation is effective for fiscal years beginning after
December 15, 2006. The Corporation is evaluating the impact of this new
pronouncement on its consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair
value measurements. FASB Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new
guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. We are currently evaluating the potential impact, if any,
of the adoption of FASB Statement No. 157 on our consolidated financial
position, results of operations and cash flows.
8
8. Effect of Recently Issued Accounting Standards (continued).
On September 29, 2006, the Financial Accounting Standards Board "FASB"
issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans ("SFAS 158"), which amends SFAS 87 and
SFAS 106 to require recognition of the overfunded or underfunded status
of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and
any remaining transition amounts under SFAS 87 and SFAS 106 that have
not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax
effects, until they are amortized as a component of net periodic cost.
The measurement date -- the date at which the benefit obligation and
plan assets are measured -- is required to be the company's fiscal year
end. SFAS 158 is effective for publicly-held companies for fiscal years
ending after December 15, 2006, except for the measurement date
provisions, which are effective for fiscal years ending after December
15, 2008. The Company is currently analyzing the effects of SFAS 158
but does not expect its implementation will have a significant impact
on the Company's financial condition or results of operations.
On September 13, 2006, the Securities and Exchange Commission "SEC"
issued Staff Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a
potential current year misstatement. Prior to SAB 108, Companies might
evaluate the materiality of financial-statement misstatements using
either the income statement or balance sheet approach, with the income
statement approach focusing on new misstatements added in the current
year, and the balance sheet approach focusing on the cumulative amount
of misstatement present in a company's balance sheet. Misstatements
that would be material under one approach could be viewed as immaterial
under another approach, and not be corrected. SAB 108 now requires that
companies view financial statement misstatements as material if they
are material according to either the income statement or balance sheet
approach. SAB 108 is effective for fiscal years ending after November
15, 2006. The Company is currently analyzing the effects of SAB 108 on
the reported results of operations or financial condition.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1,
"Accounting for Planned Major Maintenance Activities" which is
effective for fiscal years beginning after December 15, 2006. This
position statement eliminates the accrue-in-advance method of
accounting for planned major maintenance activities. We do not expect
this pronouncement to have a significant impact on the determination or
reporting of our financial results.
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, 2006 and should be read in
conjunction with the Corporation's Annual Report of Form 10-K filed with the
Securities and Exchange Commission and with the accompanying consolidated
financial statements and notes presented on pages 1 through 8 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.
9
CHANGES IN FINANCIAL CONDITION
Total assets increased $20.0 million or 7.3% to $295.5 million at September 30,
2006 from $275.5 million at December 31, 2005. This increase was primarily due
to increases in loans receivable, federal bank stocks and premises and equipment
of $22.5 million, $562,000 and $839,000, respectively. Partially offsetting this
increase were decreases in cash and cash equivalents and securities of $2.9
million and $3.7 million, respectively.
Loans receivable increased $22.5 million or 11.7% to $215.0 million at September
30, 2006 from $192.5 million at December 31, 2005. Loan production gained
momentum during the first nine months of 2006 as commercial loans increased
$16.0 million or 19.8% due to the continued focus by management on commercial
lending. Also contributing to this increase was an increase in home equity loans
of $7.5 million or 18.7% as a result of home equity advertising campaigns set
forth in the first nine months of 2006.
During the quarter ended September 30, 2006, management identified $3.4 million
in 30 year fixed rate conforming mortgage loans to sell to manage the
Corporation's interest rate risk position. In September 2006, the Corporation
sold $1.0 million of these mortgage loans.
Federal bank stocks increased $562,000 or 31.7% to $2.3 million at September 30,
2006 from $1.8 million at December 31, 2005 due to an increase in Federal Home
Loan Bank capital stock requirements resulting from borrowing three additional
$5.0 million term advances.
Premises and equipment increased $839,000 or 13.7% to $7.0 million at September
30, 2006 from $6.1 million at December 31, 2005. This increase was primarily due
to constructing a new drive-thru facility in Brookville and a new branch
facility proposed to open in November 2006.
Cash and cash equivalents decreased $2.9 million or 27.7% to $7.5 million at
September 30, 2006 from $10.4 million at December 31, 2005. The decrease in cash
and cash equivalents was primarily due to funding loan originations.
Securities decreased $3.7 million or 6.6% to $52.6 million at September 30, 2006
from $56.3 million at December 31, 2005 as a result of security maturities,
sales and repayments of $5.5 million and an increase in unrealized losses on
available for sale securities of $298,000, offset by security purchases of $1.8
million. The decrease in securities was primarily due to funding loan
originations.
Long-term borrowed funds, consisting of Federal Home Loan Bank term advances,
increased $15.0 million or 100.0% to $30.0 million at September 30, 2006 from
$15.0 million at December 31, 2005. During June and July 2006, the Corporation
entered into two separate agreements with the Federal Home Loan Bank to borrow
two $5.0 million 10 year term advances at initial interest rates of 4.98% and
4.8275%, respectively. The interest rates are fixed for the first two years of
the term after which the rates may adjust at the option of the Federal Home Loan
Bank to the then three month LIBOR rate plus 24 basis points. During August
2006, the Corporation entered into an agreement with the Federal Home Loan Bank
to borrow a $5.0 million 10 year term advance at an initial rate of 4.68%. The
interest rate is fixed for the first two years of the initial term after which
the rates may adjust at the option of the Federal Home Loan Bank to the then
three month LIBOR rate plus 24 basis points, but only if the three month LIBOR
exceeds 6.0%. If these advances convert to an adjustable rate borrowing, the
Corporation has the opportunity to repay the advances without penalty at the
conversion date.
Short-term borrowed funds, consisting of overnight Federal Home Loan Bank
borrowings, decreased $4.0 million or 88.9% to $500,000 at September 30, 2006
from $4.5 million at December 31, 2005. The repayment of these overnight
borrowings was funded by additional term advances, maturities of securities and
growth in deposits.
Deposits increased $8.5 million or 3.7% to $239.0 million at September 30, 2006
from $230.5 million at December 31, 2005 as a result of an increase in time
deposits due to marketing campaigns set forth in the first nine months of 2006.
10
Stockholders' equity increased $656,000 to $24.3 million at September 30, 2006
from $23.6 million at December 31, 2005. This increase was the result of net
income of $1.9 million offset by dividends declared of $1.0 million and an
increase in accumulated other comprehensive loss of $197,000, net of taxes. The
increase in accumulated other comprehensive loss was the result of 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, 2006 and
2005
General. Net income increased $29,000 or 4.4% to $692,000 for the three months
ended September 30, 2006 from $663,000 for the same period in 2005. This
increase was a result of an increase in net interest income of $58,000 and
decreases in noninterest expense and the provision for income taxes of $121,000
and $27,000, respectively, offset by an increase in the provision for loan
losses of $50,000 and a decrease in noninterest income of $127,000.
Net interest income. Net interest income on a tax equivalent basis increased
$65,000 or 2.7% to $2.5 million for the three months ended September 30, 2006
from $2.4 million for the same period in 2005. This net increase can be
attributed to an increase in interest income of $515,000 offset by an increase
in interest expense of $450,000.
Interest income. Interest income on a tax equivalent basis increased $515,000 or
13.4% to $4.4 million for the three months ended September 30, 2006, compared to
$3.8 million for the same period in the prior year. This increase can be
attributed to increases in interest earned on loans and federal bank stocks of
$567,000 and $14,000, respectively, offset by decreases in interest earned on
securities and interest-earning deposits with banks of $57,000 and $9,000,
respectively.
The average balance of loans receivable increased $26.9 million or 14.2% to
$216.4 million for the three months ended September 30, 2006, compared to $189.5
million for the same period in the prior year primarily due to increases in
commercial mortgage loans, business loans and home equity loans as loan
production increased throughout 2005 and the first nine months of 2006. The
increase in volume contributed an additional $457,000 in interest income. Also
contributing to this increase in volume was an increase in the yield on average
loans receivable of 22 basis points to 6.79% during the three months ended
September 30, 2006, compared to 6.57% for the same period in the prior year. The
increased yield on the loan portfolio was driven by increased commercial loan
production. Commercial loans are typically higher priced from an interest rate
perspective. The increase in the average yield contributed an additional
$110,000 in interest income.
The average balance of interest-earning cash equivalents decreased $1.2 million
or 27.2% to $3.3 million for the three months ended September 30, 2006, compared
to $4.6 million for the same period in the prior year. The decrease in the
average balance was primarily due to funding requirements for loan originations.
The decrease in the average balance resulted in a $12,000 reduction in interest
income. Offsetting this decrease in volume was the increase in the yield on
average interest-earning cash equivalents of 180 basis points to 5.02% during
the three months ended September 30, 2006, compared to 3.22% for the same period
in the prior year. The increase in yield, which was primarily due to increases
in market rates, contributed an additional $17,000 to interest income.
The average balance of securities decreased $10.0 million or 16.1% to $51.8
million for the three months ended September 30, 2006, compared to $61.8 million
for the same period in the prior year. The decrease in volume resulted in a
$113,000 reduction in interest income. The decrease in the average balance of
securities was primarily due to funding requirements for loan originations.
Offsetting this decrease in volume was the increase in the yield on average
securities of 38 basis points to 4.65% during the three months ended September
30, 2006, compared to 4.27% for the same period in the prior year. The increase
in yield contributed an additional $56,000 to interest income.
Interest expense. Interest expense increased $450,000 or 32.0% to $1.9 million
for the three months ended September 30, 2006, compared to $1.4 million for the
same period in the prior year. This increase in interest expense can be
attributed to increases in interest incurred on deposits and borrowed funds of
$294,000 and $156,000, respectively.
11
Interest expense incurred on deposits increased $294,000 or 23.8% to $1.5
million for the three months ended September 30, 2006, compared to $1.2 million
for the same period in the prior year. The average balance of interest-bearing
deposits increased $4.4 million to $193.4 million for the three months ended
September 30, 2006, compared to $189.0 million for the same period in the prior
year. The average rate of interest-bearing deposits increased 55 basis points to
3.14% at September 30, 2006 from 2.59% for the same period in the prior year.
The increases in volume and rate resulted in additional interest expense of
$29,000 and $265,000, respectively.
Interest expense incurred on borrowed funds increased $156,000 or 92.3% to
$325,000 for the three months ended September 30, 2006, compared to $169,000 for
the same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of long-term and short-term
borrowed funds of $10.6 million and $1.5 million, respectively, to $25.6 million
and $2.5 million, respectively, for the three months ended September 30, 2006,
compared to $15.0 million and $1.0 million, respectively, for the same period in
the prior year which resulted in an additional $138,000 in interest expense. The
increase in the average balance of long-term and short-term borrowed funds was
primarily due to funding increased loan production. The average rate on the
average balance of borrowed funds increased 40 basis points to 4.58% for the
three months ended September 30, 2006 from 4.18% for the same period in the
prior year and resulted in an additional $18,000 in interest expense. The
increase in the average rate of borrowings was primarily due to increases in
market rates.
12
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. The
information is based on average daily balances during the periods presented.
-----------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
------------------------------------------------------------------------------
2006 2005
-------------------------------------- --------------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans, taxable $ 209,615 $ 3,593 6.80% $ 182,540 $ 3,025 6.58%
Loans, tax exempt 6,797 111 6.47% 7,008 112 6.32%
------------- ------------- ------------- -------------
Total loans receivable 216,412 3,704 6.79% 189,548 3,137 6.57%
------------- ------------- ------------- -------------
Securities, taxable 36,706 352 3.80% 46,262 417 3.58%
Securities, tax exempt 15,118 255 6.70% 15,513 247 6.33%
------------- ------------- ------------- -------------
Total securities 51,824 607 4.65% 61,775 664 4.27%
------------- ------------- ------------- -------------
Interest-earning deposits with banks 1,121 14 4.95% 2,922 23 3.12%
Federal bank stocks 2,201 28 5.05% 1,639 14 3.39%
------------- ------------- ------------- -------------
Total interest-earning cash equivalents 3,322 42 5.02% 4,561 37 3.22%
------------- ------------- ------------- -------------
Total interest-earning assets 271,558 4,353 6.36% 255,884 3,838 5.95%
Cash and due from banks 6,711 6,952
Other noninterest-earning assets 13,740 12,376
------------- -------------
Total Assets $ 292,009 $ 275,212
============= =============
Interest-bearing liabilities:
Interest-bearing demand deposits $ 73,362 224 1.21% $ 78,998 153 0.77%
Time deposits 120,047 1,306 4.32% 110,033 1,083 3.90%
------------- ------------- ------------- -------------
Total interest-bearing deposits 193,409 1,530 3.14% 189,031 1,236 2.59%
------------- ------------- ------------- -------------
Borrowed funds, short-term 2,479 34 5.44% 1,028 11 4.25%
Borrowed funds, long-term 25,645 291 4.50% 15,000 158 4.18%
------------- ------------- ------------- -------------
Total borrowed funds 28,124 325 4.58% 16,028 169 4.18%
------------- ------------- ------------- -------------
Total interest-bearing liabilities 221,533 1,855 3.32% 205,059 1,405 2.72%
------------- ------------- ------------- -------------
Noninterest-bearing demand deposits 44,674 - - 43,107 - -
------------- ------------- ------------- -------------
Funding and cost of funds 266,207 1,855 2.76% 248,166 1,405 2.25%
Other noninterest-bearing liabilities 2,105 2,549
------------- -------------
Total Liabilities 268,312 250,715
Stockholders' Equity 23,697 24,497
------------- -------------
Total Liabilities and Stockholders' Equity $ 292,009 $ 275,212
============= =============
Net interest income $ 2,498 $ 2,433
============= =============
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 3.04% 3.23%
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.65% 3.77%
-----------------------------------------------------------------------------------------------------------------------------------
13
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
----------------------------------------------------------------------------------------------------------
Three months ended September 30,
2006 versus 2005
Increase (Decrease) due to
-----------------------------------------------------------
(Dollar amounts in thousands) Volume Rate Total
----------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 457 $ 110 $ 567
Securities (113) 56 (57)
Interest-earning deposits with banks (18) 9 (9)
Federal bank stocks 6 8 14
----------------- ------------------ -----------------
Total interest-earning assets 332 183 515
----------------- ------------------ -----------------
Interest expense:
Deposits 29 265 294
Borrowed funds 138 18 156
----------------- ------------------ -----------------
Total interest-bearing liabilities 167 283 450
----------------- ------------------ -----------------
Net interest income $ 165 $ (100) $ 65
================= ================== =================
----------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
maintain a level of total allowance for loan losses that management believes, to
the best of its knowledge, covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. 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, 2006 and 2005 is as follows:
-----------------------------------------------------------------------------------------------------
At or for the three months ended
September 30,
----------------------------------------
----------------------------------------
(Dollar amounts in thousands) 2006 2005
-----------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,898 $ 1,875
Provision for loan losses 90 40
Charge-offs (7) (32)
Recoveries 4 10
----------------- -----------------
Balance at the end of the period $ 1,985 $ 1,893
================= =================
Non-performing loans $ 1,653 $ 1,608
Non-performing assets 1,739 1,705
Non-performing loans to total loans 0.75% 0.84%
Non-performing assets to total assets 0.59% 0.62%
Allowance for loan losses to total loans 0.90% 0.99%
Allowance for loan losses to non-performing loans 120.08% 117.72%
-----------------------------------------------------------------------------------------------------
14
The provision for loan losses increased $50,000 or 125.0% to $90,000 for the
three month period ended September 30, 2006 from $40,000 for the same period in
the prior year. Management's evaluation of the loan portfolio, including the
changing composition of the portfolio as well as economic trends, regulatory
considerations and other factors contributed to the recognition of $90,000 in
the provision for loan losses during the three months ended September 30, 2006.
Noninterest income. Noninterest income decreased $127,000 or 13.8% to $793,000
during the three months ended September 30, 2006, compared to $920,000 during
the same period in the prior year. This decrease can be attributed to decreases
in customer fees and service charges and gains on the sale of securities of
$16,000 and $156,000, respectively. Offsetting this decrease in noninterest
income were increases in commissions earned on financial services, gains on the
sale of loans, earnings on bank-owned life insurance and other noninterest
income of $13,000, $7,000, $9,000 and $16,000, respectively.
Noninterest expense. Noninterest expense decreased $121,000 or 5.1% to $2.3
million during the three months ended September 30, 2006, compared to $2.4
million during the same period in the prior year. This decrease in noninterest
expense can be attributed to decreases in intangible amortization, premises and
equipment and other noninterest expenses of $6,000, $14,000 and $194,000,
respectively. Offsetting this decrease in noninterest expense was an increase in
compensation and employee benefits of $93,000.
Other noninterest expense decreased $194,000 or 28.6% to $485,000 during the
three months ended September 30, 2006, compared to $679,000 for the same period
in the prior year. This decrease can be attributed primarily to decreases in
telephone and communication, Pennsylvania use tax expense and other expenses.
Partially offsetting these decreases were increases in MAC processing expense,
printing and office supplies, postage, marketing and Pennsylvania shares tax
expense between the two periods.
Provision for income taxes. The provision for income taxes decreased $27,000 or
17.0% to $132,000 for the three months ended September 30, 2006, compared to
$159,000 for the same period in the prior year due primarily to the decrease in
the effective tax rate to 16.0% in 2006 from 19.3% 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, 2006 and
2005
General. Net income remained stable at $1.9 million for the nine month periods
ended September 30, 2006 and 2005. This was a result of an increase in net
interest income of $6,000 and a decrease in noninterest expenses of $71,000,
offset by an increase in the provisions for loan losses and income taxes of
$23,000 and $16,000, respectively, and a decrease in noninterest income of
$42,000.
Net interest income. Net interest income on a tax equivalent basis increased
$28,000 to $7.30 million for the nine months ended September 30, 2006 from $7.27
million for the same period in 2005. This net increase can be attributed to an
increase in interest income of $878,000 offset by an increase in interest
expense of $850,000.
Interest income. Interest income on a tax equivalent basis increased $878,000 or
7.7% to $12.3 million for the nine months ended September 30, 2006, compared to
$11.4 million for the same period in the prior year. This increase can be
attributed to increases in interest earned on loans and federal bank stocks of
$1.1 million and $24,000, respectively, offset by decreases in interest earned
on securities and interest-earning deposits with banks of $180,000 and $17,000,
respectively.
15
The average balance of loans receivable increased $17.3 million or 9.3% to
$203.8 million for the nine months ended September 30, 2006, compared to $186.5
million for the same period in the prior year primarily due to increases in
commercial mortgage loans, business loans and home equity loans as loan
production increased throughout 2005 and the first nine months of 2006. The
yield on average loans receivable increased 13 basis points to 6.74% during the
nine months ended September 30, 2006, compared to 6.61% for the same period in
the prior year. The increase in the average yield was primarily due to 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 $869,000 and $182,000, respectively, to interest
income.
The average balance of interest-earning cash equivalents decreased $1.8 million
or 34.5% to $3.4 million for the nine months ended September 30, 2006, compared
to $5.2 million for the same period in the prior year. The decrease in the
average balance was primarily due to funding requirements for loan originations
and resulted in a $54,000 reduction in interest income. Offsetting this decrease
in volume was an increase in the yield on average interest-earning cash
equivalents of 183 basis points to 4.79% during the nine months ended September
30, 2006, compared to 2.96% for the same period in the prior year. The increase
in yield, which was primarily due to increases in market rates, contributed an
additional $37,000 to interest income.
The average balance of securities decreased $10.1 million or 15.9% to $53.6
million for the nine months ended September 30, 2006, compared to $63.7 million
for the same period in the prior year. The decrease in volume resulted in a
$343,000 reduction in interest income. The decrease in the average balance of
securities was primarily due to funding requirements for loan originations.
Offsetting this decrease in volume was an increase in the yield on average
securities of 36 basis points to 4.64% during the nine months ended September
30, 2006, compared to 4.28% for the same period in the prior year. The increase
in yield contributed an additional $163,000 to interest income.
Interest expense. Interest expense increased $850,000 or 20.7% to $5.0 million
for the nine months ended September 30, 2006, compared to $4.1 million for the
same period in the prior year. This increase in interest expense can be
attributed to increases in interest incurred on deposits and borrowed funds of
$673,000 and $177,000, respectively.
Interest expense incurred on deposits increased $673,000 or 18.6% to $4.3
million for the nine months ended September 30, 2006, compared to $3.6 million
for the same period in the prior year. This increase in interest expense can be
attributed to an increase in the average rate of interest-bearing deposits of 46
basis points to 3.00% for the nine months ended September 30, 2006 from 2.54%
for the same period in the prior year. This increase in rate resulted from
increases in market rates and resulted in an additional $664,000 of interest
expense between the nine month period ended September 30, 2006 and 2005. Also
contributing to the increase in interest expense was the increase in the average
balance of interest-bearing deposits of $497,000 to $191.3 million at September
30, 2006, compared to $190.8 million for the same period in the prior year
resulting in an additional $9,000 of interest expense.
Interest expense incurred on borrowed funds increased $177,000 or 36.8% to
$658,000 for the nine months ended September 30, 2006, compared to $481,000 for
the same period in the prior year. This increase in interest expense can be
attributed to the increase in the average balance of borrowed funds of $4.8
million or 31.5% to $20.2 million for the nine months ended September 30, 2006,
compared to $15.4 million for the same period in the prior year which resulted
in an additional $157,000 in interest expense. The increase in the average
balance of long-term and short-term borrowed funds was primarily due to funding
increased loan originations. The average rate on the average balance of borrowed
funds increased 17 basis points to 4.36% for the nine months ended September 30,
2006 from 4.19% for the same period in the prior year and resulted in an
additional $20,000 in interest expense. The increase in the average rate of
borrowing was primarily due to increases in market rates.
16
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. The
information is based on average daily balances during the periods presented.
---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------------------------------------------------------
2006 2005
---------------------------------------- --------------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans, taxable $ 196,972 $ 9,938 6.75% $ 179,402 $ 8,882 6.62%
Loans, tax exempt 6,835 330 6.46% 7,104 335 6.30%
------------- -------------- ----------- -------------- ------------- -----------
Total loans receivable 203,807 10,268 6.74% 186,506 9,217 6.61%
------------- -------------- ----------- -------------- ------------- -----------
Securities, taxable 38,332 1,103 3.85% 48,246 1,301 3.61%
Securities, tax exempt 15,235 758 6.65% 15,480 740 6.39%
------------- -------------- ----------- -------------- ------------- -----------
Total securities 53,567 1,861 4.64% 63,726 2,041 4.28%
------------- -------------- ----------- -------------- ------------- -----------
Interest-earning deposits with banks 1,585 55 4.64% 3,657 72 2.63%
Federal bank stocks 1,850 68 4.91% 1,584 44 3.71%
------------- -------------- ----------- -------------- ------------- -----------
Total interest-earning cash equivalents 3,435 123 4.79% 5,241 116 2.96%
------------- -------------- ----------- -------------- ------------- -----------
Total interest-earning assets 260,809 12,252 6.28% 255,473 11,374 5.95%
Cash and due from banks 6,908 7,466
Other noninterest-earning assets 13,295 12,270
------------- --------------
Total assets $ 281,012 $ 275,209
============= ==============
Interest-bearing liabilities:
Interest-bearing demand deposits $ 73,103 545 1.00% $ 79,977 434 0.73%
Time deposits 118,220 3,748 4.24% 110,849 3,186 3.84%
------------- -------------- ----------- -------------- ------------- -----------
Total interest-bearing deposits 191,323 4,293 3.00% 190,826 3,620 2.54%
------------- -------------- ----------- -------------- ------------- -----------
Borrowed funds, long-term 18,663 600 4.30% 15,000 470 4.19%
Borrowed funds, short-term 1,528 58 5.07% 358 11 4.11%
------------- -------------- ----------- -------------- ------------- -----------
Total borrowed funds 20,191 658 4.36% 15,358 481 4.19%
------------- -------------- ----------- -------------- ------------- -----------
Total interest-bearing liabilities 211,514 4,951 3.13% 206,184 4,101 2.66%
Noninterest-bearing demand deposits 43,604 - - 42,249 - -
------------- -------------- ----------- -------------- ------------- -----------
Funding and cost of funds 255,118 4,951 2.59% 248,433 4,101 2.21%
Other noninterest-bearing liabilities 2,271 2,551
------------- --------------
Total liabilities 257,389 250,984
Stockholders' equity 23,623 24,225
------------- --------------
Total liabilities and stockholders'
equity $ 281,012 $ 275,209
============= ==============
Net interest income $ 7,301 $ 7,273
============= ============
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 3.15% 3.29%
========== ==========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.74% 3.81%
========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
17
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,
2006 versus 2005
Increase (Decrease) due to
-------------------------------------------------------
(Dollar amounts in thousands) Volume Rate Total
----------------------------------------------------------------
Interest income:
Loans $ 869 $ 182 $ 1,051
Securities (343) 163 (180)
Interest-earning deposits with banks (54) 37 (17)
Federal bank stocks 8 16 24
------------ ------------ -------------
Total interest-earning assets 480 398 878
------------ ------------ -------------
Interest expense:
Deposits 9 664 673
Borrowed funds 157 20 177
------------ ------------ -------------
Total interest-bearing liabilities 166 684 850
------------ ------------ -------------
Net interest income $ 314 $ (286) $ 28
============ ============ =============
------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
maintain a level of total allowance for loan losses that management believes, to
the best of its knowledge, covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. 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, 2006 and 2005 is as follows:
---------------------------------------------------------------------------------------
At or for the nine months ended
September 30,
-----------------------------------
(Dollar amounts in thousands) 2006 2005
---------------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,869 $ 1,810
Provision for loan losses 168 145
Charge-offs (74) (99)
Recoveries 22 37
--------------- ---------------
Balance at the end of the period $ 1,985 $ 1,893
=============== ===============
Non-performing loans $ 1,653 $ 1,608
Non-performing assets 1,739 1,705
Non-performing loans to total loans 0.75% 0.84%
Non-performing assets to total assets 0.59% 0.62%
Allowance for loan losses to total loans 0.90% 0.99%
Allowance for loan losses to non-performing loans 120.08% 117.72%
---------------------------------------------------------------------------------------
18
The provision for loan losses increased $23,000 or 15.9% to $168,000 for the
nine month period ended September 30, 2006 from $145,000 for the same period in
the prior year. Management's evaluation of the loan portfolio, including the
changing composition of the portfolio as well as economic trends, regulatory
considerations and other factors contributed to the recognition of $168,000 in
the provision for loan losses during the nine months ended September 30, 2006.
Noninterest income. Noninterest income decreased $42,000 or 1.8% to $2.29
million during the nine months ended September 30, 2006, compared to $2.33
million during the same period in the prior year. This decrease can be
attributed to decreases in commissions earned on financial services and gains on
the sale of securities of $32,000 and $134,000, respectively. Offsetting this
decrease in noninterest income were increases in customer fees and service
charges, gains on the sale of loans and other noninterest income of $98,000,
$4,000 and $22,000, respectively.
Noninterest expense. Noninterest expense decreased $71,000 or 1.0% to $6.7
million during the nine months ended September 30, 2006, compared to $6.8
million during the same period in the prior year. This decrease in noninterest
expense can be attributed to decreases in intangible amortization and other
noninterest expenses of $22,000 and $295,000, respectively. Offsetting this
decrease in noninterest expense were increases in compensation and employee
benefits and premises and equipment of $188,000 and $58,000, respectively.
Compensation and employee benefits expense increased $188,000 or 5.0% to $4.0
million during the nine months ended September 30, 2006, compared to $3.8
million for the same period in the prior year. Normal annual salary and wage
adjustments, the increase in full-time equivalents, increased employee
retirement costs, additional wages paid to temporary employees, higher
director's fees and commissions paid to a financial services representative were
the major components of this increase.
Premises and equipment expense increased $58,000 or 5.4% to $1.14 million during
the nine months ended September 30, 2006, compared to $1.08 million for the same
period in the prior year. The increase was primarily due to increased occupancy
costs related to our new drive-thru facility in Brookville, as well as costs
related to the construction of a new branch location.
Other noninterest expense decreased $295,000 or 15.6% to $1.6 million during the
nine months ended September 30, 2006, compared to $1.9 million for the same
period in the prior year. This decrease can be attributed primarily to decreases
in professional fees, telephone and communication expenses, Pennsylvania use tax
expense, travel and entertainment expenses and other noninterest expenses.
Partially offsetting these decreases were increases in Pennsylvania shares tax
expense, printing and office supplies, postage and marketing expenses between
the two periods.
Provision for income taxes. The provision for income taxes increased $16,000 or
3.5% to $474,000 for the nine months ended September 30, 2006, compared to
$458,000 for the same period in the prior year due to an increase in the
Corporation's pre-tax earnings base between the first nine months of 2006 and
2005. Also contributing to the increase was the increase in the effective tax
rate to 20.1% in 2006 from 19.6% in 2005 due to the expiration of tax credits
generated in previous years. 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.
19
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, 2006, the Corporation used its sources of funds primarily to
fund loan originations and for the repayment of short-term borrowed funds. As of
such date, the Corporation had outstanding loan commitments, including
undisbursed loans and amounts available under credit lines, totaling $22.0
million, and standby letters of credit totaling $560,000.
At September 30, 2006, time deposits amounted to $123.1 million or 51.5% of the
Corporation's total consolidated deposits, including approximately $44.9 million
of 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, 2006, the Corporation's borrowing capacity
with the FHLB, net of funds borrowed, was $106.7 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.
CRITICAL ACCOUNTING POLICIES
Management views critical accounting policies to be those which are highly
dependent on subjective or complex judgments, estimates and assumptions and
where changes in those estimates and assumptions could have a significant impact
on the financial statements. Management currently views the determination of the
allowance for loan losses as a critical accounting policy.
The allowance for loan losses provides for an estimate of probable losses in the
loan portfolio. In determining the appropriate level of the allowance for loan
loss, the loan portfolio is separated into risk-rated and homogeneous pools.
Migration analysis/historical loss rates, adjusted for relevant trends, have
been applied to these pools. Qualitative adjustments are then applied to the
portfolio to allow for quality of lending policies and procedures, national and
local economic and business conditions, changes in the nature and volume of the
portfolio, experience, ability and depth of lending management, changes in the
trends, volumes and severity of past due, non-accrual and classified loans and
loss and recovery trends, quality of the Corporation's loan review system,
concentrations of credit, and external factors. The methodology used to
determine the adequacy of the Corporation's allowance for loan losses is
comprehensive and meets regulatory and accounting industry standards for
assessing the allowance, however it is still an estimate. Loan losses are
charged against the allowance while recoveries of amounts previously charged-off
are credited to the allowance. Loan loss provisions are charged against current
earnings based on management's periodic evaluation and review of the factors
indicated above.
20
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,
2006, the Corporation's interest-earning assets maturing or repricing within one
year totaled $74.7 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $80.8 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $6.1 million or
a negative 2.1% of total assets. At September 30, 2006, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
92.5%.
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, 2005.
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 Chief Financial 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).
There has been no change made in the Corporation's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
21
As of the quarter ended September 30, 2006, 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 Chief Financial 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 Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures were effective. There
have been no significant changes in the Corporation's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Corporation completed its evaluation.
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 1A. Risk Factors
----------------------
There have been no material changes from risk factors as previously disclosed in
the 2005 Form 10-K.
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 Chief Financial Officer
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350
22
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 13, 2006 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: November 13, 2006 By: /s/ William C. Marsh
--------------------------------------------
William C. Marsh
Chief Financial Officer
23