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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 June 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
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EMCLAIRE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1606091
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
612 Main Street, Emlenton, Pennsylvania 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 August 10, 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
June 30, 2006 and December 31, 2005......................................1
Consolidated Statements of Income for the three and six
months ended June 30, 2006 and 2005......................................2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 and 2005......................................3
Consolidated Statements of Changes in Stockholders'
Equity for the three and six months ended June 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.........................8
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 1A. Risk Factors............................................................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................................................................21
Signatures ........................................................................22
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
-------------------------------------
Emclaire Financial Corp. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2006 (Unaudited) and December 31, 2005
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2006 2005
-------------- -------------
Assets
------
Cash and due from banks $5,321 $9,399
Interest-earning deposits with banks 443 968
-------------- -------------
Cash and cash equivalents 5,764 10,367
Securities available for sale, at fair value 51,618 56,289
Securities held to maturity; fair value of $14 and $14 14 15
Loans receivable, net of allowance for loan losses of $1,890 and $1,869 209,943 192,526
Federal bank stocks, at cost 2,104 1,773
Bank-owned life insurance 4,702 4,623
Accrued interest receivable 1,211 1,271
Premises and equipment, net 6,727 6,123
Goodwill 1,422 1,422
Deferred tax asset 694 375
Prepaid expenses and other assets 752 733
-------------- -------------
Total Assets $284,951 $275,517
============== =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $45,165 $44,044
Interest-bearing 193,318 186,459
-------------- -------------
Total deposits 238,483 230,503
Short-term borrowed funds 1,200 4,500
Long-term borrowed funds 20,000 15,000
Accrued interest payable 673 607
Accrued expenses and other liabilities 1,115 1,292
-------------- -------------
Total Liabilities 261,471 251,902
-------------- -------------
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 14,181 13,678
Accumulated other comprehensive loss (664) (26)
-------------- -------------
Total Stockholders' Equity 23,480 23,615
-------------- -------------
Total Liabilities and Stockholders' Equity $284,951 $275,517
============== =============
See accompanying notes to consolidated financial statements.
1
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Income
For the three and six months ended June 30, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended
June 30, June 30,
----------------------------- ---------------------------
2006 2005 2006 2005
-------------- -------------- ------------- -------------
Interest and dividend income:
Loans receivable, including fees $3,344 $3,131 $6,496 $6,015
Securities:
Taxable 367 439 750 884
Exempt from federal income tax 174 174 348 348
Federal bank stocks 23 17 40 30
Deposits with banks 23 21 41 49
-------------- -------------- ------------- -------------
Total interest and dividend income 3,931 3,782 7,675 7,326
-------------- -------------- ------------- -------------
Interest expense:
Deposits 1,448 1,186 2,763 2,384
Borrowed funds 166 156 334 312
-------------- -------------- ------------- -------------
Total interest expense 1,614 1,342 3,097 2,696
-------------- -------------- ------------- -------------
Net interest income 2,317 2,440 4,578 4,630
Provision for loan losses 47 45 78 105
-------------- -------------- ------------- -------------
Net interest income after provision for loan losses 2,270 2,395 4,500 4,525
-------------- -------------- ------------- -------------
Noninterest income:
Fees and service charges 377 366 734 621
Commissions on financial services 114 161 215 260
Gains on securities 126 86 242 219
Gain on the sale of loans - - - 3
Earnings on bank-owned life insurance (BOLI) 41 50 91 100
Other 111 94 215 210
-------------- -------------- ------------- -------------
Total noninterest income 769 757 1,497 1,413
-------------- -------------- ------------- -------------
Noninterest expense:
Compensation and employee benefits 1,290 1,278 2,597 2,502
Premises and equipment 372 354 753 680
Intangible amortization expense 3 10 5 21
Other 588 688 1,113 1,214
-------------- -------------- ------------- -------------
Total noninterest expense 2,253 2,330 4,468 4,417
-------------- -------------- ------------- -------------
Income before provision for income taxes 786 822 1,529 1,521
Provision for income taxes 184 168 342 300
-------------- -------------- ------------- -------------
Net income $602 $654 $1,187 $1,221
============== ============== ============= =============
Basic earnings per share $0.47 $0.52 $0.94 $0.96
Average common shares outstanding 1,267,835 1,267,835 1,267,835 1,267,835
See accompanying notes to consolidated financial statements.
2
Emclaire Financial Corp. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands)
For the six months ended
June 30,
----------------------------
2006 2005
-------------- -------------
Operating Activities:
Net income $1,187 $1,221
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 370 404
Provision for loan losses 78 105
Amortization of premiums and accretion of discounts, net 20 69
Gain on sale of loans - (3)
Loans originated for sale - (156)
Proceeds from sales of loans held for sale - 342
Gains on sale of securities available for sale (242) (219)
Earnings on bank-owned life insurance, net (79) (92)
(Increase) decrease in accrued interest receivable 60 (6)
Decrease in prepaid expenses and other assets 1 50
Increase in accrued interest payable 66 -
Increase (decrease) in accrued expenses and other liabilities (177) 113
-------------- -------------
Net cash provided by operating activities 1,284 1,828
-------------- -------------
Investing Activities:
Loan originations and principal collections, net (17,518) (8,043)
Available-for-sale securities:
Sales 413 742
Maturities, repayments and calls 4,054 3,921
Purchases (528) (3,396)
Held-to-maturity securities:
Maturities, repayments and calls 1 1
(Purchase) redemption of Federal bank stocks (331) 108
Purchases of premises and equipment (974) (409)
-------------- -------------
Net cash used in investing activities (14,883) (7,076)
-------------- -------------
Financing Activities:
Net increase (decrease) in deposits 7,981 (90)
Increase in borrowed funds 1,700 500
Dividends paid on common stock (685) (634)
-------------- -------------
Net cash provided by (used in) financing activities 8,996 (224)
-------------- -------------
Net decrease in cash and cash equivalents (4,603) (5,472)
Cash and cash equivalents at beginning of period 10,367 14,624
-------------- -------------
Cash and cash equivalents at end of period $5,764 $9,152
============== =============
Supplemental information:
Interest paid $3,031 $2,696
Income taxes paid 390 167
Supplemental noncash disclosures:
Transfers from loans to foreclosed real estate $- $86
See accompanying notes to consolidated financial statements.
3
Emclaire Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the three and six months ended June 30, 2006 and 2005 (Unaudited)
(Dollar amounts in thousands, except per share data)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
2006 2005 2006 2005
------------ ------------ ----------- -----------
Balance at beginning of period $23,679 $23,166 $23,615 $23,616
Net income 602 654 1,187 1,221
Change in net unrealized gains (losses) on available
for sale securities, net of taxes (376) 437 (477) (176)
Less reclassification adjustment for gains included
in net income, net of taxes (83) (57) (160) (145)
------------ ------------ ----------- -----------
Other comprehensive income (loss) (459) 380 (637) (321)
------------ ------------ ----------- -----------
Total comprehensive income 143 1,034 550 900
Dividends declared (342) (318) (685) (634)
---------------------------------------------------
Balance at end of period $23,480 $23,882 $23,480 $23,882
============ ============ =========== ===========
Common cash dividend per share $0.27 $0.25 $0.54 $0.50
============ ============ =========== ===========
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.
3. Employee Benefit Plans.
Defined Contribution Plan.
--------------------------
The Corporation maintains a defined contribution 401(k) Plan. Employees are
eligible to participate by providing tax-deferred contributions up to 20%
of qualified compensation. Employee contributions are vested at all times.
The Corporation makes matching contributions as approved by the Board of
Directors. Matching contributions for the three months ended June 30, 2006
and 2005 amounted to $21,000 and $19,000, respectively. Matching
contributions for the six months ended June 30, 2006 and 2005 amounted to
$42,000 and $37,000, 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.
The components of the periodic pension cost are as follows:
-----------------------------------------------------------------------------------------------------------
For the three months ended For the six months ended Year ended
June 30, June 30, December 31,
-------------------------- ------------------------- ------------
(Dollar amounts in thousands) 2006 2005 2006 2005 2005
---------------------------------------------------- ------------ ------------ ----------- ------------
Service cost $52 $42 $104 $84 $188
Interest cost 58 51 116 102 214
Expected return on plan assets (66) (61) (132) (122) (246)
Transition asset (2) (2) (4) (4) (8)
Prior service costs (8) (8) (16) (16) 19
Recognized net actuarial (gain) loss 15 9 24 18 -
------------ ------------ ------------ ----------- ------------
Net periodic pension cost $49 $31 $92 $62 $167
============ ============ ============ =========== ============
-----------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets is 8.50% for the periods ended
June 30, 2006 and 2005. The Corporation previously disclosed in its
financial statements for the year ended December 31, 2005 that it expected
to contribute $135,000 to its pension plan in 2006. The Corporation
presently expects to contribute $202,000 to fund its pension plan in 2006.
4. 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:
-------------------
June 30, 2006:
U.S. Government agencies and related entities $32,352 $- $(1,098) $31,254
Mortgage-backed securities 2,734 - (176) 2,558
Municipal securities 14,686 346 (3) 15,029
Corporate securities 500 - - 500
Equity securities 2,352 173 (248) 2,277
------------ ------------ ------------ ------------
$52,624 $519 $(1,525) $51,618
============ ============ ============ ============
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:
-----------------
June 30, 2006:
Mortgage-backed securities $14 $- $- $14
------------ ------------ ------------ ------------
$14 $- $- $14
============ ============ ============ ============
December 31, 2005:
Mortgage-backed securities $15 $- $(1) $14
------------ ------------ ------------ ------------
$15 $- $(1) $14
============ ============ ============ ============
--------------------------------------------------------------------------------------------------------
6
5. Loans Receivable.
The Corporation's loans receivable as of the respective dates are
summarized as follows:
----------------------------------------------------------------------
June 30, December 31,
(Dollar amounts in thousands) 2006 2005
----------------------------------------------------------------------
Mortgage loans on real estate:
Residential first mortgages $68,588 $66,011
Home equity loans and lines of credit 43,825 39,933
Commercial real estate 57,818 52,990
------------- -------------
170,231 158,934
Other loans:
Commercial business 33,606 27,732
Consumer 7,996 7,729
------------- -------------
41,602 35,461
------------- -------------
Total loans, gross 211,833 194,395
Less allowance for loan losses 1,890 1,869
------------- -------------
Total loans, net $209,943 $192,526
============= =============
----------------------------------------------------------------------
6. 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 $45,165 19.0% $44,044 19.1%
Interest-bearing demand deposits 73,527 30.8% 74,067 32.1%
Time deposits 119,791 50.2% 112,392 48.8%
--------- -------- --------- ---------
$238,483 100.0% $230,503 100.0%
========= ======== ========= =========
--------------------------------------------------------------------------
7. Guarantees.
The Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Of
these letters of credit at June 30, 2006, $258,000 automatically renews
within the next twelve months and $76,000 will expire within the next
twelve 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 June 30, 2006 for guarantees under standby letters
of credit issued is not material.
7
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
------------------------------------------------------------------------
This section discusses the consolidated financial condition and results of
operations of Emclaire Financial Corp. (the "Corporation") and its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the "Bank"), for the
three and six month periods ended June 30, 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.
CHANGES IN FINANCIAL CONDITION
Total assets increased $9.4 million or 3.4% to $285.0 million at June 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
$17.4 million, $331,000 and $604,000, respectively. Partially offsetting this
increase were decreases in cash and cash equivalents and securities of $4.6
million and $4.7 million, respectively.
Loans receivable increased $17.4 million or 9.1% to $209.9 million at June 30,
2006 from $192.5 million at December 31, 2005. Loan production gained momentum
during the first six months of 2006 as home equity loans increased $3.9 million
or 9.8% as a result of a home equity advertising campaign set forth in April.
Also contributing to this increase was an increase in commercial loans of $10.7
million or 13.3% due to the continued focus by management on commercial lending.
Federal bank stocks increased $331,000 or 18.7% to $2.1 million at June 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 an additional $5.0
million term advance.
8
Premises and equipment increased $604,000 or 9.9% to $6.7 million at June 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 beginning construction
of a new branch facility proposed to open in October 2006.
Cash and cash equivalents decreased $4.6 million or 44.4% to $5.8 million at
June 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 $4.7 million or 8.3% to $51.6 million at June 30, 2006 from
$56.3 million at December 31, 2005 as a result of security maturities, sales and
repayments of $4.5 million and an increase in unrealized losses on available for
sale securities of $967,000. The decrease in securities was primarily due to
funding loan originations.
Long-term borrowed funds, consisting of Federal Home Loan Bank term advances,
increased $5.0 million or 33.3% to $20.0 million at June 30, 2006 from $15.0
million at December 31, 2005. During June 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 interest rate of 4.98%. The interest rate is fixed for the
first two years of the term after which the rate may adjust at the option of the
Federal Home Loan Bank to the then three month LIBOR rate plus 24 basis points.
If the advance converts to an adjustable rate borrowing, the Corporation has the
opportunity to repay the advance without penalty at the conversion date.
Short-term borrowed funds, consisting of overnight Federal Home Loan Bank
borrowings, decreased $3.3 million or 73.3% to $1.2 million at June 30, 2006
from $4.5 million at December 31, 2005. The repayment of these overnight
borrowings was funded by an additional term advance, maturities of securities
and growth in deposits.
Deposits increased $8.0 million or 3.5% to $238.5 million at June 30, 2006 from
$230.5 million at December 31, 2005 primarily as a result of an increase in time
deposits due to marketing campaigns set forth in the first six months of 2006.
Stockholders' equity decreased $135,000 to $23.5 million at June 30, 2006 from
$23.6 million at December 31, 2005. This decrease was the result of net income
of $1.2 million offset by dividends declared of $685,000 and an increase in
accumulated other comprehensive loss of $637,000, 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 June 30, 2006 and 2005
General. Net income decreased $52,000 or 8.0% to $602,000 for the three months
ended June 30, 2006 from $654,000 for the same period in 2005. This decrease was
a result of decreases in net interest income of $123,000 and increases in the
provision for loan losses and the provision for income taxes of $2,000 and
$16,000, respectively, offset by an increase in noninterest income of $12,000
and a decrease in noninterest expense of $77,000.
Net interest income. Net interest income on a tax equivalent basis decreased
$115,000 or 4.5% to $2.4 million for the three months ended June 30, 2006 from
$2.5 million for the same period in 2005. This net increase can be attributed to
an increase in interest income of $157,000 offset by an increase in interest
expense of $272,000.
Interest income. Interest income on a tax equivalent basis increased $157,000 or
4.0% to $4.0 million for the three months ended June 30, 2006, compared to $3.9
million for the same period in the prior year. This increase can be attributed
to increases in interest earned on loans, interest-earning deposits with banks
and federal bank stocks of $215,000, $2,000 and $6,000, respectively, offset by
a decrease in interest earned on securities of $66,000.
9
The average balance of loans receivable increased $14.8 million or 8.0% to
$201.2 million for the three months ended June 30, 2006, compared to $186.3
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 six months of 2006. The
increase in volume contributed an additional $249,000 in interest income.
Offsetting this increase in volume was a decrease in the yield on average loans
receivable of 8 basis points to 6.73% during the three months ended June 30,
2006, compared to 6.81% for the same period in the prior year. This decrease was
the result of the Corporation realizing a one time recovery of interest income
related to the work out of a nonperforming credit associated with an individual
commercial customer during the quarter ended June 30, 2005. The decrease in the
average yield resulted in a $34,000 reduction in interest income.
The average balance of interest-earning cash equivalents decreased $1.3 million
or 26.1% to $3.6 million for the three months ended June 30, 2006, compared to
$4.9 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 $10,000 reduction in interest income. Offsetting this decrease in
volume was the increase in the yield on average interest-earning cash
equivalents of 200 basis points to 5.12% during the three months ended June 30,
2006, compared to 3.12% for the same period in the prior year. The increase in
yield, which was primarily due to increases in market rates, contributed an
additional $18,000 to interest income.
The average balance of securities decreased $11.0 million or 17.1% to $53.2
million for the three months ended June 30, 2006, compared to $64.2 million for
the same period in the prior year. The decrease in volume resulted in a $124,000
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 39
basis points to 4.67% during the three months ended June 30, 2006, compared to
4.28% for the same period in the prior year. The increase in yield contributed
an additional $58,000 to interest income.
Interest expense. Interest expense increased $272,000 or 20.3% to $1.6 million
for the three months ended June 30, 2006, compared to $1.3 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 $262,000 and
$10,000, respectively.
Interest expense incurred on deposits increased $262,000 or 22.1% to $1.4
million for the three months ended June 30, 2006, compared to $1.2 million for
the same period in the prior year. The average balance of interest-bearing
deposits increased $848,000 to $192.4 million for the three months ended June
30, 2006, compared to $191.5 million for the same period in the prior year. The
average rate of interest-bearing deposits increased 54 basis points to 3.02% at
June 30, 2006 from 2.48% for the same period in the prior year. The increases in
volume and yield resulted in additional interest expense of $5,000 and $257,000,
respectively.
Interest expense incurred on borrowed funds increased $10,000 or 6.4% to
$166,000 for the three months ended June 30, 2006, compared to $156,000 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 $278,000 and $1.1 million, respectively, to $15.3 million and
$1.1 million, respectively, for the three months ended June 30, 2006, compared
to $15.0 million and $38,000, respectively, for the same period in the prior
year which resulted in an additional $14,000 in interest expense. The average
rate on the average balance of borrowed funds decreased 10 basis points to 4.06%
for the three months ended June 30, 2006 from 4.16% for the same period in the
prior year and resulted in a reduction in interest expense of $4,000.
10
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 June 30,
--------------------------------------------------------------
2006 2005
------------------------------- ------------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans, taxable $194,339 $3,267 6.74% $179,271 $3,052 6.83%
Loans, tax exempt 6,851 111 6.47% 7,073 111 6.29%
----------- ----------- ---------- -----------
Total loans receivable 201,190 3,378 6.73% 186,344 3,163 6.81%
----------- ----------- ---------- -----------
Securities, taxable 38,004 367 3.87% 48,776 439 3.61%
Securities, tax exempt 15,209 252 6.65% 15,403 246 6.41%
----------- ----------- ---------- -----------
Total securities 53,213 619 4.67% 64,179 685 4.28%
----------- ----------- ---------- -----------
Interest-earning deposits with banks 1,900 23 4.86% 3,344 21 2.52%
Federal bank stocks 1,707 23 5.40% 1,540 17 4.43%
----------- ----------- ---------- -----------
Total interest-earning cash equivalents 3,607 46 5.12% 4,884 38 3.12%
----------- ----------- ---------- -----------
Total interest-earning assets 258,010 4,043 6.29% 255,407 3,886 6.10%
Cash and due from banks 6,889 7,781
Other noninterest-earning assets 13,330 12,378
----------- ----------
Total Assets $278,229 $275,566
=========== ==========
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $72,554 $175 0.97% $80,328 $135 0.67%
Time deposits 119,814 1,273 4.26% 111,192 1,051 3.79%
----------- ----------- ---------- -----------
Total interest-bearing deposits 192,368 1,448 3.02% 191,520 1,186 2.48%
----------- ----------- ---------- -----------
Borrowed funds, short-term 1,126 15 5.34% 38 - 0.00%
Borrowed funds, long-term 15,278 151 3.96% 15,000 156 4.17%
----------- ----------- ---------- -----------
Total borrowed funds 16,404 166 4.06% 15,038 156 4.16%
----------- ----------- ---------- -----------
Total interest-bearing liabilities 208,772 1,614 3.10% 206,558 1,342 2.61%
----------- ----------- ---------- -----------
Noninterest-bearing demand deposits 43,779 - - 42,292 - -
----------- ----------- ---------- -----------
Funding and cost of funds 252,551 1,614 2.56% 248,850 1,342 2.16%
Other noninterest-bearing liabilities 2,116 2,703
----------- ----------
Total Liabilities 254,667 251,553
Stockholders' Equity 23,562 24,013
----------- ----------
Total Liabilities and Stockholders' Equity $278,229 $275,566
=========== ----------- ========== -----------
Net interest income $2,429 $2,544
=========== ===========
Interest rate spread (difference between 3.18% 3.49%
weighted average rate on interest-earning
assets and interest-bearing liabilities)
Net interest margin (net interest 3.78% 4.00%
income as a percentage of average
interest-earning assets)
----------------------------------------------------------------------------------------------------------------
11
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
----------------------------------------------------------------------------
Three months ended June 30,
2006 versus 2005
Increase (Decrease) due to
-----------------------------
(Dollar amounts in thousands) Volume Rate Total
----------------------------------------------------------------------------
Interest income:
Loans $249 $(34) $215
Securities (124) 58 (66)
Interest-earning deposits with banks (12) 14 2
Federal bank stocks 2 4 6
--------- --------- ---------
Total interest-earning assets 115 42 157
--------- --------- ---------
Interest expense:
Deposits 5 257 262
Borrowed funds 14 (4) 10
--------- --------- ---------
Total interest-bearing liabilities 19 253 272
--------- --------- ---------
Net interest income $96 $(211) $(115)
========= ========= =========
----------------------------------------------------------------------------
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 June 30, 2006 and 2005 is as follows:
------------------------------------------------------------------------------------
At or for the three months ended
June 30,
---------------------------------
(Dollar amounts in thousands) 2006 2005
------------------------------------------------------------------------------------
Balance at the beginning of the period $1,893 $1,850
Provision for loan losses 47 45
Charge-offs (61) (29)
Recoveries 11 9
---------------- ----------------
Balance at the end of the period $1,890 $1,875
================ ================
Non-performing loans $1,546 $1,723
Non-performing assets 1,632 1,811
Non-performing loans to total loans 0.73% 0.91%
Non-performing assets to total assets 0.57% 0.66%
Allowance for loan losses to total loans 0.89% 0.99%
Allowance for loan losses to non-performing loans 122.25% 108.82%
------------------------------------------------------------------------------------
12
The provision for loan losses increased $2,000 or 4.4% to $47,000 for the three
month period ended June 30, 2006 from $45,000 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
$47,000 in the provision for loan losses during the three months ended June 30,
2006.
Noninterest income. Noninterest income increased $12,000 or 1.6% to $769,000
during the three months ended June 30, 2006, compared to $757,000 during the
same period in the prior year. This increase can be attributed to increases in
customer fees and service charges, gains on the sale of securities and other
noninterest income of $11,000, $40,000 and $17,000, respectively. Offsetting
this increase in noninterest income were decreases in commissions earned on
financial services and earnings on bank-owned life insurance of $47,000 and
$9,000, respectively.
Noninterest expense. Noninterest expense decreased $77,000 or 3.3% to $2.25
million during the three months ended June 30, 2006, compared to $2.33 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 $7,000 and $100,000, respectively. Offsetting this decrease in
noninterest expense were increases in compensation and employee benefits and
premises and equipment expenses of $12,000 and $18,000, respectively.
Other noninterest expense decreased $100,000 or 14.5% to $588,000 during the
three months ended June 30, 2006, compared to $688,000 for the same period in
the prior year. This decrease can be attributed primarily to decreases in
professional fees, telephone and communication, travel and entertainment and
other expenses. Partially offsetting these decreases were increases in printing
and office supplies, postage, marketing and Pennsylvania shares tax expense
between the two periods.
Premises and equipment expense increased $18,000 or 5.1% to $372,000 during the
three months ended June 30, 2006, compared to $354,000 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 land purchased
for a new branch location.
Provision for income taxes. The provision for income taxes increased $16,000 or
9.5% to $184,000 for the three months ended June 30, 2006, compared to $168,000
for the same period in the prior year due primarily to the increase in the
effective tax rate to 23.4% in 2006 from 18.8% in 2005 as a result of 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.
Comparison of Results for the Six Month Periods Ended June 30, 2006 and 2005
General. Net income decreased $34,000 or 2.8% to $1.19 million for the six
months ended June 30, 2006 from $1.22 million for the same period in 2005. This
decrease was a result of a decrease in net interest income of $52,000 and
increases in noninterest expenses and the provision for income taxes of $51,000
and $42,000, respectively, offset by a decrease in the provision for loan losses
of $27,000 and an increase in noninterest income of $84,000.
Net interest income. Net interest income on a tax equivalent basis decreased
$37,000 or 1.0% to $4.80 million for the six months ended June 30, 2006 from
$4.84 million for the same period in 2005. This net decrease can be attributed
to an increase in interest income of $364,000 offset by an increase in interest
expense of $401,000.
Interest income. Interest income on a tax equivalent basis increased $364,000 or
4.8% to $7.9 million for the six months ended June 30, 2006, compared to $7.5
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 $484,000 and
$10,000, respectively, offset by decreases in interest earned on securities and
interest-earning deposits with banks of $122,000 and $8,000, respectively.
13
The average balance of loans receivable increased $12.9 million or 7.0% to
$197.4 million for the six months ended June 30, 2006, compared to $184.5
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 six months of 2006. The yield
on average loans receivable increased 5 basis points to 6.70% during the six
months ended June 30, 2006, compared to 6.65% 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 $430,000 and $54,000, respectively, to interest income.
The average balance of interest-earning cash equivalents decreased $2.8 million
or 44.2% to $3.5 million for the six months ended June 30, 2006, compared to
$6.3 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 $40,000 reduction in interest income. Offsetting this decrease in
volume was the increase in the yield on average interest-earning cash
equivalents of 213 basis points to 4.67% during the six months ended June 30,
2006, compared to 2.54% for the same period in the prior year. The increase in
yield, which was primarily due to increases in market rates, contributed an
additional $42,000 to interest income.
The average balance of securities decreased $10.2 million or 15.7% to $54.5
million for the six months ended June 30, 2006, compared to $64.6 million for
the same period in the prior year. The decrease in volume resulted in a $228,000
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 34
basis points to 4.64% during the six months ended June 30, 2006, compared to
4.30% for the same period in the prior year. The increase in yield contributed
an additional $106,000 to interest income.
Interest expense. Interest expense increased $401,000 or 14.9% to $3.1 million
for the six months ended June 30, 2006, compared to $2.7 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 $379,000 and
$22,000, respectively.
Interest expense incurred on deposits increased $379,000 or 15.9% to $2.8
million for the six months ended June 30, 2006, compared to $2.4 million for the
same period in the prior year. This increase in interest expense can be
attributed to the increase in the average rate of interest-bearing deposits of
42 basis points to 2.93% at June 30, 2006 from 2.51% for the same period in the
prior year. This increase in yield resulted in an additional $399,000 of
interest expense between the six month period ended June 30, 2006 and 2005.
Offsetting the increase in yield was the decrease in the average balance of
interest-bearing deposits of $1.6 million or 1.0% to $190.3 million at June 30,
2006, compared to $191.9 million for the same period in the prior year resulting
in a $20,000 reduction in interest expense. The decrease in interest-bearing
deposits can be attributed to the movement of customer deposits into mutual
funds as well as investing in the stock market as they attempt to obtain higher
yields on their monies.
Interest expense incurred on borrowed funds increased $22,000 or 7.1% to
$334,000 for the six months ended June 30, 2006, compared to $312,000 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 $1.2
million or 7.7% to $16.2 million for the six months ended June 30, 2006,
compared to $15.0 million for the same period in the prior year which resulted
in an additional $24,000 in interest expense. The average rate on the average
balance of borrowed funds decreased 2 basis points to 4.17% for the six months
ended June 30, 2006 from 4.19% for the same period in the prior year and
resulted in a reduction in interest expense of $2,000.
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. The
information is based on average daily balances during the periods presented.
----------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Yield / Average Yield /
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------
Interest-earning assets:
------------------------
Loans, taxable $190,559 $6,344 6.71% $177,325 $5,857 6.66%
Loans, tax exempt 6,854 220 6.46% 7,153 223 6.29%
--------- --------- ------- --------- --------- -------
Total loans receivable 197,413 6,564 6.70% 184,478 6,080 6.65%
--------- --------- ------- --------- --------- -------
Securities, taxable 39,161 750 3.86% 49,158 884 3.63%
Securities, tax exempt 15,296 504 6.65% 15,465 492 6.42%
--------- --------- ------- --------- --------- -------
Total securities 54,457 1,254 4.64% 64,623 1,376 4.30%
--------- --------- ------- --------- --------- -------
Interest-earning deposits with banks 1,828 41 4.52% 4,705 49 2.10%
Federal bank stocks 1,671 40 4.83% 1,571 30 3.85%
--------- --------- ------- --------- --------- -------
Total interest-earning cash equivalents 3,499 81 4.67% 6,276 79 2.54%
--------- --------- ------- --------- --------- -------
Total interest-earning assets 255,369 7,899 6.24% 255,377 7,535 5.95%
Cash and due from banks 6,997 7,663
Other noninterest-earning assets 13,073 12,190
--------- ---------
Total assets $275,439 $275,230
========= =========
Interest-bearing liabilities:
-----------------------------
Interest-bearing demand deposits $72,974 $321 0.89% $80,601 $281 0.70%
Time deposits 117,300 2,442 4.20% 111,283 2,103 3.81%
--------- --------- ------- --------- --------- -------
Total interest-bearing deposits 190,274 2,763 2.93% 191,884 2,384 2.51%
--------- --------- ------- --------- --------- -------
Borrowed funds, long-term 15,138 310 4.13% 15,000 312 4.19%
Borrowed funds, short-term 1,033 24 4.69% 19 - 0.00%
--------- --------- ------- --------- --------- -------
Total borrowed funds 16,171 334 4.17% 15,019 312 4.19%
--------- --------- ------- --------- --------- -------
Total interest-bearing liabilities 206,445 3,097 3.03% 206,903 2,696 2.63%
Noninterest-bearing demand deposits 43,050 - - 41,737 - -
--------- --------- ------- --------- --------- -------
Funding and cost of funds 249,495 3,097 2.50% 248,640 2,696 2.19%
Other noninterest-bearing liabilities 2,357 2,538
--------- ---------
Total liabilities 251,852 251,178
Stockholders' equity 23,587 24,052
--------- ---------
Total liabilities and stockholders' equity $275,439 $275,230
========= --------- ========= ---------
Net interest income $4,802 $4,839
========= =========
Interest rate spread (difference between 3.21% 3.32%
weighted average rate on interest-earning ======= =======
assets and interest-bearing liabilities)
Net interest margin (net interest 3.79% 3.82%
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.
--------------------------------------------------------------------------------
Six months ended June 30,
2006 versus 2005
Increase (Decrease) due to
------------------------------------
(Dollar amounts in thousands) Volume Rate Total
-------------------------------------
Interest income:
Loans $430 $54 $484
Securities (228) 106 (122)
Interest-earning deposits with banks (42) 34 (8)
Federal bank stocks 2 8 10
------------ ----------- ---------
Total interest-earning assets 162 202 364
------------ ----------- ---------
Interest expense:
Deposits (20) 399 379
Borrowed funds 24 (2) 22
------------ ----------- ---------
Total interest-bearing liabilities 4 397 401
------------ ----------- ---------
Net interest income $158 $(195) $(37)
============ =========== =========
--------------------------------------------------------------------------------
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of the allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectibility of the
loan portfolio.
Information pertaining to the allowance for loan losses and non-performing
assets for the six months ended June 30, 2006 and 2005 is as follows:
---------------------------------------------------------------------------------------------------
At or for the
At or for the six months ended year ended
June 30, December 31,
--------------------------------- -------------
(Dollar amounts in thousands) 2006 2005 2005
---------------------------------------------------------------------------------------------------
Balance at the beginning of the period $1,869 $1,810 1,810
Provision for loan losses 78 105 205
Charge-offs (74) (67) (197)
Recoveries 17 27 51
----------------- --------------- -------------
Balance at the end of the period $1,890 $1,875 $1,869
================= =============== =============
Non-performing loans $1,546 $1,723 1,452
Non-performing assets 1,632 1,811 1,558
Non-performing loans to total loans 0.73% 0.91% 0.75%
Non-performing assets to total assets 0.57% 0.66% 0.57%
Allowance for loan losses to total loans 0.89% 0.99% 0.96%
Allowance for loan losses to non-performing loans 122.25% 108.82% 128.72%
---------------------------------------------------------------------------------------------------
16
The provision for loan losses decreased $27,000 or 25.7% to $78,000 for the six
month period ended June 30, 2006 from $105,000 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
$78,000 in the provision for loan losses during the six months ended June 30,
2006.
Noninterest income. Noninterest income increased $84,000 or 5.9% to $1.5 million
during the six months ended June 30, 2006, compared to $1.4 million during the
same period in the prior year. This increase can be attributed to increases in
customer fees and service charges, gains on the sale of securities and other
noninterest income of $113,000, $23,000 and $5,000, respectively. Offsetting
this increase in noninterest income were decreases in commissions earned on
financial services, gains on the sale of loans and earnings on bank-owned life
insurance of $45,000, $3,000 and $9,000, respectively.
The increase in customer fees and service charges of $113,000 or 18.2% was
primarily a result of the new overdraft privilege program, which was implemented
in April 2005.
Noninterest expense. Noninterest expense increased $51,000 or 1.2% to $4.5
million during the six months ended June 30, 2006, compared to $4.4 million
during the same period in the prior year. This increase in noninterest expense
can be attributed to increases in compensation and employee benefits and
premises and equipment of $95,000 and $73,000, respectively. Offsetting this
increase in noninterest expense were decreases in intangible amortization and
other noninterest expenses of $16,000 and $101,000, respectively.
Compensation and employee benefits expense increased $95,000 or 3.8% to $2.6
million during the six months ended June 30, 2006, compared to $2.5 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 $73,000 or 10.7% to $753,000 during the
six months ended June 30, 2006, compared to $680,000 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 land purchased for a
new branch location.
Other noninterest expense decreased $101,000 or 8.3% to $1.1 million during the
six months ended June 30, 2006, compared to $1.2 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 shares tax
expense and travel and entertainment expenses. Partially offsetting these
decreases were increases in printing and office supplies, postage and marketing
expenses between the two periods.
Provision for income taxes. The provision for income taxes increased $42,000 or
14.0% to $342,000 for the six months ended June 30, 2006, compared to $300,000
for the same period in the prior year due to an increase in the Corporation's
pre-tax earnings base between the first six months of 2006 and 2005. Also
contributing to the increase was the increase in the effective tax rate to 22.4%
in 2006 from 18.8% 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.
17
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and amortization and
prepayments of outstanding loans and maturing securities. During the six months
ended June 30, 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 $26.5 million, and
standby letters of credit totaling $447,000.
At June 30, 2006, time deposits amounted to $119.8 million or 50.2% of the
Corporation's total consolidated deposits, including approximately $47.0 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 June 30, 2006, the Corporation's borrowing capacity with
the FHLB, net of funds borrowed, was $110.6 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.
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 June 30, 2006,
the Corporation's interest-earning assets maturing or repricing within one year
totaled $64.4 million while the Corporation's interest-bearing liabilities
maturing or repricing within one-year totaled $86.9 million, providing an excess
of interest-bearing liabilities over interest-earning assets of $22.5 million or
a negative 8.0% of total assets. At June 30, 2006, the percentage of the
Corporation's assets to liabilities maturing or repricing within one year was
74.1%.
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.
19
As of the quarter ended June 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
------------------------------------------------------------
(a) The annual meeting of stockholders of the Corporation was held May 17,
2006. Of 1,267,835 common shares eligible to vote, 1,057,890 or 83.3% were
voted in person or by proxy.
(b) The following Class B directors were elected for a three year term expiring
in 2008:
Name Shares For Shares Withheld
---- ---------- ---------------
Ronald L. Ashbaugh 1,047,830 10,060
George W. Freeman 1,047,516 10,374
Brian C. McCarrier 1,023,217 34,673
In addition to the above listed individuals, the following persons continue
to serve as directors: James M. Crooks, Robert L. Hunter, John B. Mason, J.
Michael King, Mark A. Freemer and David L. Cox.
(c) The recommendation of the Board of Directors to ratify the appointment of
Beard Miller Company LLP as the Corporation's independent auditors, as
described in the proxy statement for the annual meeting was approved with
1,056,327 shares in favor, 323 shares against and 1,240 shares abstained.
Item 5. Other Information
--------------------------
(a) Not applicable.
(b) Not applicable.
20
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
21
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Date: August 10, 2006 By: /s/ David L. Cox
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: August 10, 2006 By: /s/ William C. Marsh
--------------------------------------------
William C. Marsh
Chief Financial Officer
22