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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
Commission File Number: 000-18464
EMCLAIRE FINANCIAL CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1606091
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
612 MAIN STREET, EMLENTON, PENNSYLVANIA 16373
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(Address of principal executive offices) (Zip Code)
(724) 867-2311
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [X] No [_]
The number of shares outstanding of the Registrant's common stock was
1,267,835 at November 10, 2004.
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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, 2004 and December 31, 2003.........................1
Consolidated Income Statements for the three and nine
months ended September 30, 2004 and 2003.........................2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003.........................3
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 2004 and 2003.....4
Notes to Consolidated Financial Statements.......................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......18
Item 4. Controls and Procedures.........................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................19
Item 2. Changes in Securities and Use of Proceeds.......................19
Item 3. Defaults Upon Senior Securities.................................19
Item 4. Submission of Matters to a Vote of Security Holders.............19
Item 5. Other Information...............................................19
Item 6. Exhibits and Reports on Form 8-K................................19
Signatures ................................................................20
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
As of September 30, 2004 (Unaudited) and December 31, 2003
(Dollar amounts in thousands, except share data)
SEPTEMBER 30,DECEMBER 31,
2004 2003
-------- --------
ASSETS
Cash and due from banks $ 6,158 $ 6,776
Interest-earning deposits in banks 5,548 927
--------- ---------
Cash and cash equivalents 11,706 7,703
Securities available for sale 59,279 49,145
Securities held to maturity; fair value of $16 and $17 16 17
Loans receivable, held for sale 473 --
Loans receivable, net of allowance for loan
losses of $1,716 and $1,777
183,260 190,482
Federal bank stocks, at cost 1,692 1,982
Bank-owned life insurance 4,427 4,272
Accrued interest receivable 1,191 1,270
Premises and equipment 5,472 5,223
Goodwill 1,422 1,422
Other intangible assets 49 54
Prepaid expenses and other assets 1,211 942
--------- ---------
Total assets $ 270,198 $ 262,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 38,577 $ 36,332
Interest bearing 191,554 180,778
--------- ---------
Total deposits 230,131 217,110
Borrowed funds 15,000 20,700
Accrued interest payable 503 477
Accrued expenses and other liabilities 1,163 1,570
--------- ---------
Total liabilities 246,797 239,857
--------- ---------
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 11,930 11,033
Accumulated other comprehensive income 1,508 1,659
--------- ---------
Total stockholders' equity 23,401 22,655
--------- ---------
Total liabilities and stockholders' equity $ 270,198 $ 262,512
========= =========
See accompanying notes to consolidated financial statements.
1
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Income Statements
For the three and nine months ended September 30, 2004 and 2003
(Unaudited) (Dollar amounts in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 2,961 $ 2,965 $ 8,827 $ 8,919
Securities:
Taxable 360 373 990 1,076
Exempt from federal income tax 175 181 524 560
Federal bank stocks 8 13 29 39
Deposits with banks and federal funds sold 17 2 32 24
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 3,521 3,534 10,402 10,618
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 1,129 1,073 3,322 3,286
Borrowed funds 158 154 475 365
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,287 1,227 3,797 3,651
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,234 2,307 6,605 6,967
Provision for loan losses 95 75 170 225
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,139 2,232 6,435 6,742
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 282 268 836 777
Commissions 11 -- 11 --
Gain on sale of securities available for sale 88 60 257 115
Gain on sale of loans held for sale 39 5 37 23
Earnings on bank-owned life insurance 56 58 167 175
Other 100 76 269 228
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 576 467 1,577 1,318
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Compensation and employee benefits 1,087 1,022 3,259 3,198
Premises and equipment, net 315 245 919 786
Intangible amortization expense 9 34 25 107
Other 538 540 1,704 1,567
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 1,949 1,841 5,907 5,658
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 766 858 2,105 2,402
Provision for income taxes 81 209 333 585
---------- ---------- ---------- ----------
Net income $ 685 $ 649 $ 1,772 $ 1,817
========== ========== ========== ==========
Basic Earnings per Share $ 0.54 $ 0.51 $ 1.40 $ 1.38
Weighted average common shares outstanding 1,267,835 1,280,552 1,267,835 1,313,131
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, 2004 (Unaudited)
(Dollar amounts in thousands)
For the nine months ended
September 30,
-----------------------------
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,772 $ 1,817
Adjustments to reconcile net income to net cash provided
by operating activities 1,361 453
-------- --------
NET CASH FROM OPERATING ACTIVITIES 3,133 2,270
-------- --------
INVESTING ACTIVITIES:
Loan originations, net of principal collections 6,593 (13,445)
Purchases of securities available for sale (22,174) (37,062)
Redemption (Purchases) of Federal bank stocks 290 (644)
Repayments, maturities and calls of securities
available for sale 9,679 31,565
Principal repayments of securities held to maturity 1 12
Proceeds from the sale of securities available for sale 704 582
Purchase of customer relationship intangible (20) --
Purchases of premises and equipment (649) (1,406)
-------- --------
NET CASH FROM INVESTING ACTIVITIES (5,576) (20,398)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 13,021 11,468
Increase (Decrease) in overnight borrowed funds (5,700) 2,930
Proceeds from long term advances -- 5,000
Dividends paid on common stock (875) (829)
Payments to acquire treasury stock -- (1,682)
-------- --------
NET CASH FROM FINANCING ACTIVITIES 6,446 16,887
-------- --------
Net (decrease) increase in cash equivalents 4,003 (1,241)
Cash equivalents at beginning of period 7,703 7,716
-------- --------
Cash equivalents at end of period $ 11,706 $ 6,475
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 3,771 $ 3,645
Income taxes paid 232 708
See accompanying notes to consolidated financial statements.
3
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2004 and 2003 (Unaudited)
(Dollar amounts in thousands)
For the three months ended For the nine months ended
September 30, September 30,
------------------------- -----------------------
2004 2003 2004 2003
--------- --------- -------- --------
BALANCE AT BEGINNING OF PERIOD $ 22,559 $ 22,835 $ 22,655 $ 22,680
Net income 685 649 1,772 1,817
Change in net unrealized gain on available for sale
securities, net of taxes 506 (345) 18 539
Less reclassification adjustment for gains included
in net income, net of taxes (58) (39) (169) (75)
-------- -------- -------- --------
Other comprehensive income (loss) 448 (384) (151) 464
Total comprehensive income 1,133 265 1,621 2,281
Dividends paid (291) (269) (875) (829)
Purchase of treasury stock (65,000 shares) -- (381) -- (1,682)
-------- -------- -------- --------
BALANCE AT END OF PERIOD $ 23,401 $ 22,450 $ 23,401 $ 22,450
======== ======== ======== ========
Common cash dividend per share $ 0.23 $ 0.21 $ 0.69 $ 0.63
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
EMCLAIRE FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BUSINESS AND BASIS OF PRESENTATION
Emclaire Financial Corp. (the Corporation) is a Pennsylvania
corporation and bank holding company that provides a full range of
retail and commercial financial products and services to customers in
western Pennsylvania through its wholly owned subsidiary bank, the
Farmers National Bank of Emlenton (the Bank), a national banking
association. The consolidated financial statements contained herein
include the accounts of the Corporation and the Bank, which operate as
one operating segment. The Corporation's business is conducted
principally through the bank. All inter-company amounts have been
eliminated.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not
include all information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America. For further information, refer to the
audited consolidated financial statements and footnotes thereto for the
year ended December 31, 2003, as contained in the Corporation's 2003
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 and deferred tax assets. 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 SHARE
The Corporation maintains a simple capital structure with no
potentially dilutive instruments. Earnings per share computations are
based on the weighted average number of common shares outstanding for
the respective reporting periods.
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 and nine
months ended September 30, 2004 was $17,000 and $50,000, respectively.
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.
5
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED BENEFIT PLAN (CONTINUED).
The Corporation uses a December 31 measurement date for its plans.
Information pertaining to the components of the periodic pension cost
is as follows:
- -----------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended Year ended
September 30, September 30, September 30, September 30, December 31,
(Dollar amounts in thousands) 2004 2003 2004 2003 2003
- ------------------------------------------------------------------------------------------------ -------------
Service cost $ 41 $ 37 $ 123 $ 110 $ 147
Interest cost 46 41 138 123 164
Expected return on plan assets (53) (44) (159) (132) (176)
Transition asset (2) (2) (6) (6) (8)
Prior service costs (8) (8) (24) (23) (31)
Recognized net actuarial (gain) loss 8 12 24 35 47
------------------------------------------------------- --------------
Net periodic pension cost $ 32 $ 36 $ 96 $ 107 $ 143
======================================================= ==============
The expected rate of return on plan assets is 8.50% for the periods
ended September 30, 2004 and December 31, 2003. The Corporation
contributed $209,000 to its pension plan for the nine month period
ending September 30, 2004.
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, 2004 and should be read in
conjunction with the accompanying consolidated financial statements and notes
presented on pages 1 through 6.
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 $7.7 million or 2.9% to $270.2 million at September 30,
2004 from $262.5 million at December 31, 2003. This increase was primarily due
to increases in cash and cash equivalents and securities of $4.0 million and
$10.1 million, respectively. Offsetting this increase was a decrease in loans
receivable of $6.7 million.
Cash and cash equivalents increased $4.0 million or 52.0% to $11.7 million at
September 30, 2004 from $7.7 million at December 31, 2003 primarily as a result
of the increase in deposits of $13.0 million, the decrease in loans receivable
of $6.7 million and the maturities of securities of $9.7 million, offset by the
purchase of $22.1 million of securities and the repayment of $5.7 million of
overnight borrowings.
Securities increased $10.1 million or 20.6% to $59.3 million at September 30,
2004 from $49.2 million at December 31, 2003 as a result of investing deployable
funds in US government agencies and mortgage backed securities. These types of
investments are considered a lower investment risk and complement the overall
asset/liability and liquidity objectives of the Corporation.
Loans receivable decreased $6.7 million or 3.5% to $183.7 million at September
30, 2004 from $190.5 million at December 31, 2003. During the nine months ended
September 30, 2004, the refinancing activity experienced in 2003 has decreased.
Also contributing to the change in loan volume was the pay-off of two short-term
commercial loans financed in the fourth quarter 2003 and the sale of a portion
of the student loan portfolio of $3.9 million in the third quarter of 2004. The
remaining balance of $473,000 of student loans will be sold by June 2005 and
have been classified as loans held for sale on the balance sheet.
Federal bank stocks decreased $290,000 or 14.7% to $1.7 million at September 30,
2004 from $2.0 million at December 31, 2003. The levels of capital stock
required by the Federal Home Loan Bank is directly correlated to our borrowings
and decreased as a result of the decrease in our FHLB overnight borrowings of
$5.7 million.
Other intangible assets decreased $5,000 or 9.8% to $49,000 at September 30,
2004 from $54,000 at December 31, 2003. Contributing to this decrease was
intangible amortization expense of $25,000 for the nine months ended September
30, 2004. Offsetting this decrease was an increase of $20,000 as a result of the
purchase of a customer list associated with our new investment advisory
services. In July 2004, the Bank formed a partnership with Blue Vase Securities,
LLC. Blue Vase Securities, LLC is a nation-wide, full service, independent
broker/dealer. This partnership allows us to offer investment advisory services
to our customers whose needs extend beyond the traditional banking products. Our
financial services representative has been associated with Blue Vase for several
years and as a result had an established customer base. The Bank purchased these
established customer relationships for $20,000 and will be amortized over the
next 2 years.
7
Deposits increased $13.0 million or 6.0% to $230.1 million at September 30, 2004
from $217.1 million at December 31, 2003. The increase in deposits during the
period can be attributed to the introduction of a new Certificate of Deposit
product which steps up to a higher rate at each year anniversary date over the
next four years, the marketing efforts put forth in our Clarion market and the
transfer of two large sweep accounts into other demand deposit accounts.
Borrowed funds decreased $5.7 million or 27.5% to $15.0 million at September 30,
2004 from $20.7 million at December 31, 2003. The repayment of FHLB overnight
borrowings of $5.7 million was a result of using excess funds from the decrease
in loan demand and the increase in deposits.
Stockholders' equity increased $746,000 or 3.3% to $23.4 million at September
30, 2004 from $22.7 million at December 31, 2003. This increase was the result
of increases in retained earnings of $897,000; comprised of net income of $1.8
million offset by dividends paid of $875,000, and a decrease in accumulated
other comprehensive income of $151,000.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
GENERAL. Net income for the three months ended September 30, 2004 increased
$36,000 or 5.6% to $685,000 from $649,000 for the three months ended September
30, 2003. This increase was a result of an increase in noninterest income of
$109,000 and a decrease in the provision for income taxes of $128,000.
Offsetting this favorable variance was a decrease in net interest income of
$73,000 and increases in noninterest expense and the provision for loan losses
of $108,000 and $20,000, respectively.
NET INTEREST INCOME. Net interest income on a tax equivalent basis decreased
$74,000 or 3.1% to $2.3 million for the three months ended September 30, 2004
from $2.4 million for the same period in 2003. This net decrease can be
attributed to a decrease in interest income of $14,000 coupled with an increase
in interest expense of $60,000.
INTEREST INCOME. Interest income on a tax equivalent basis decreased $14,000 to
$3.6 million for the three months ended September 30, 2004, compared to $3.6
million for the same period in the prior year. This decrease in interest income
can be attributed to a 24 basis point decline in the interest rate on average
interest-earning assets to 5.78% during the three months ended September 30,
2004, compared to 6.02% for the same period in the prior year. The yield on
average loans, securities and interest-bearing cash equivalents decreased to
6.42%, 4.20% and 1.53%, respectively, during the three months ended September
30, 2004, compared to 6.57%, 4.48% and 1.91%, respectively, for the same period
in the prior year. The decrease in interest income due to rate was offset by an
increase in the average balance of interest-earning assets, as average loans
receivable, securities and interest-bearing cash equivalents increased to $185.7
million, $57.6 million and $6.5 million, respectively, during the three months
ended September 30, 2004, compared to $181.2 million, $55.7 million and $3.1
million, respectively, during the same period in the prior year. Increases in
average loans and interest-bearing cash equivalents between quarterly periods
were funded by deposit growth. See comments in the "Changes in Financial
Condition" section above for discussion of security and deposit growth factors.
INTEREST EXPENSE. Interest expense increased $60,000 or 4.9% to $1.3 million for
the three months ended September 30, 2004, compared to $1.2 million for the same
period in the prior year. This increase in interest expense can be attributed to
an increase in the average balance of interest-bearing liabilities, as average
interest-bearing deposits increased to $189.5 million during the three months
ended September 30, 2004, compared to $177.1 million during the same period in
the prior year. Offsetting this increase in interest-bearing liabilities was a
decrease in borrowed funds to $15.0 million during the three months ended
September 30, 2004, compared to $17.7 million during the same period in the
prior year. The interest rate on average interest-bearing liabilities was 2.50%
for the three months ended September 30, 2004 and 2003. The average cost of
deposits was 2.09% for the three months ended September 30, 2004 and 2003.
8
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS. The following table sets forth,
for 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.
- ----------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YEILD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- ------------------------
Loans, taxable $178,302 $ 2,878 6.42% $174,040 $ 2,885 6.58%
Loans, tax exempt 7,388 117 6.32% 7,121 113 6.30%
-------- -------- --------- -------- -------- --------
TOTAL LOANS RECEIVABLE 185,690 2,995 6.42% 181,161 2,998 6.57%
-------- -------- --------- -------- -------- ---------
Securities, taxable 42,262 360 3.39% 40,206 373 3.68%
Securities, tax exempt 15,291 248 6.44% 15,504 256 6.56%
-------- -------- --------- -------- -------- ---------
TOTAL SECURITIES 57,553 608 4.20% 55,710 629 4.48%
-------- -------- --------- -------- -------- ---------
Interest-earning cash equivalents 4,794 17 1.41% 1,234 2 0.64%
Federal bank stocks 1,690 8 1.88% 1,886 13 2.73%
-------- -------- --------- -------- -------- ---------
TOTAL INTEREST-BEARING CASH EQUIVALENTS 6,484 25 1.53% 3,120 15 1.91%
-------- -------- --------- -------- -------- ---------
TOTAL INTEREST-EARNING ASSETS 249,727 3,628 5.78% 239,991 3,642 6.02%
Cash and due from banks 7,744 5,762
Other noninterest-earning assets 12,263 11,184
-------- --------
Total assets $269,734 $256,937
======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
Interest-bearing demand deposits $ 77,829 $ 106 0.54% $ 78,946 $ 144 0.72%
Time deposits 111,698 1,023 3.64% 98,119 929 3.76%
-------- -------- --------- -------- -------- ---------
TOTAL INTEREST-BEARING DEPOSITS 189,527 1,129 2.37% 177,065 1,073 2.40%
-------- -------- --------- -------- -------- ---------
Borrowed funds, term 15,000 158 4.19% 15,000 147 3.89%
Borrowed funds, overnight -- -- 0.00% 2,662 7 1.04%
-------- -------- --------- -------- -------- ---------
TOTAL BORROWED FUNDS 15,000 158 4.19% 17,662 154 3.46%
-------- -------- --------- -------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES 204,527 1,287 2.50% 194,727 1,227 2.50%
Noninterest-bearing demand deposits 40,168 -- -- 38,084 --
-------- -------- --------- -------- -------- --------
FUNDING AND COST OF FUNDS 244,695 1,287 2.09% 232,811 1,227 2.09%
Other noninterest- bearing liabilities 2,002 -- 2,023
-------- -------- --------
Total liabilities 246,697 1,287 234,834
Stockholders' equity 23,037 22,103
-------- --------
Total liabilities and stockholders'
equity $269,734 $256,937
======== ======== ======== --------
NET INTEREST INCOME $ 2,341 $ 2,415
=========
INTEREST RATE SPREAD (difference between 3.28% 3.52%
weighted average rate on interest-earning ========= ==========
assets and interest-bearing liabilities)
NET INTEREST MARGIN (net interest 3.73% 3.99%
income as a percentage of average ========= =========
interest-earning assets)
- -----------------------------------------------------------------------------------------------------------------
9
ANALYSIS OF CHANGES IN NET INTEREST INCOME. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on loans and securities reflect the
changes in interest income on a fully tax equivalent basis.
- -----------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30,
2004 VERSUS 2003
INCREASE (DECREASE) DUE TO
--------------------------------------------------
VOLUME RATE TOTAL
- ------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 74 $ (77) $ (3)
Securities 20 (41) (21)
Interest-earning cash
equiva1ents 11 4 15
Federal bank stocks (1) (4) (5)
----- ----- -----
Total interest-earning asse104 (118) (14)
----- ----- -----
INTEREST EXPENSE:
Deposits 74 (18) 56
Borrowed funds (25) 29 4
----- ----- -----
Total interest-bearing liabilities 49 11 60
----- ----- -----
NET INTEREST INCOME $ 55 $(129) $ (74)
===== ===== =====
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 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 third quarter of 2004 and 2003 is as follows:
- -------------------------------------------------------------------------------
For the three months ended
(Dollar amounts in thousands) September 30, September 30,
-------------- -------------
2004 2003
- ----------------------------------------------------------------- -------------
Balance at the beginning of the period $ 1,809 $ 1,698
Provision for Loan Losses 95 75
Charge-Offs (196) (87)
Recoveries 8 19
------- -------
Balance at the end of the period $ 1,716 $ 1,705
======= =======
Non-performing loans $ 1,244 $ 1,650
Non-performing assets 1,314 1,650
Non-performing loans to total loans 0.67% 0.89%
Non-performing assets to total assets 0.49% 0.65%
Allowance for loan losses to total loans 0.93% 0.92%
Allowance for loan losses to non-performing loans 137.94% 103.33%
10
The provision for loan losses increased $20,000 or 26.7% to $95,000 for the
three month period ending September 30, 2004 from $75,000 for the same period in
the prior year. Despite the decrease in loans receivable, the actual allowance
level increased $11,000 or 1.0% as a result of an increase in charged off loans
of $109,000 and a decrease in recoveries of $11,000. Management's evaluation of
the loan portfolio, including economic trends, regulatory considerations, the
increase in charged-off loans and other factors contributed to the recognition
of $95,000 in the provision for loan losses during the three months ended
September 30, 2004.
NONINTEREST INCOME. Noninterest income increased $109,000 or 23.3% to $576,000
during the three months ended September 30, 2004, compared to $467,000 during
the same period in the prior year. This increase can be attributed to the
increase in customer service fees, commissions, gains on the sale of marketable
equity securities and on the sale of loans and other noninterest income of
$14,000, $11,000, $28,000, $34,000 and $24,000, respectively. The increase in
customer service fees was a result of the increase in the overdraft fees and
also the increase in the number of accounts. Also contributing to the increase
in noninterest income was the increase in commissions earned of $11,000
resulting from the addition of the investment advisory services in July 2004.
The increase in gains on loans sold of $34,000 was the result of the sale of our
student loan portfolio in September 2004. Offsetting this favorable variance was
a decrease in the earnings on bank-owned life insurance of $2,000.
NONINTEREST EXPENSE. Noninterest expense increased $108,000 or 5.9% to $1.9
million during the three months ended September 30, 2004, compared to $1.8
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 expense $65,000 and $70,000, respectively. This increase
was offset by decreases in intangible amortization expense and other noninterest
expense of $25,000 and $2,000, respectively.
Compensation and employee benefits expense increased $65,000 to $1.09 million
during the three months ended September 30, 2004, compared to $1.02 million for
the same period in the prior year. Contributing to this variance was the
increase in employee and officer salaries and employee insurance expense offset
by the decrease in employee incentive costs and deferred loan costs associated
with salaries as a result of lower loan production. The increase in salaries and
insurance expense is a direct result of increased personnel.
Premises and equipment expense increased $70,000 or 28.6% to $315,000 during the
three months ended September 30, 2004, compared to $245,000 for the same period
in the prior year. This increase can be primarily attributed to increased
building and equipment depreciation expenses, repairs and maintenance, real
estate taxes and equipment service contracts of $7,000, $35,000, $7,000, $8,000
and $7,000, respectively. Contributing to the increases in depreciation expenses
between the two periods was the completion of the construction on the main
office building during the fourth quarter of 2003 and the addition of a new
mainframe and imaging system in January 2004.
Intangible amortization expense decreased $25,000 or 73.5% to $9,000 during the
three months ended September 30, 2004, compared to $34,000 for the same period
in the prior year. This variance was a result of the cessation of amortization
expense on three branches previously acquired which were fully amortized in the
fourth quarter of 2003. Offsetting this decrease was an increase in the
amortization of $1,000 for the newly acquired customer relationship intangible
associated with the addition of the investment advisory services (see comments
in Changes in Financial Condition above) in July 2004.
Other noninterest expense decreased $2,000 to $538,000 during the three months
ended September 30, 2004, compared to $540,000 for the same period in the prior
year. This decrease can be attributed primarily to decreases in telephone and
communication expenses, marketing expenses, Pennsylvania shares taxes and travel
and entertainment expenses. Partially offsetting this favorable variance were
increases in professional fees and software depreciation between the two
periods.
11
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $128,000 or
61.2% to $81,000 for the three months ended September 30, 2004, compared to
$209,000 for the same period in the prior year. Contributing to this favorable
variance was the decrease in the Corporation's effective tax rate resulting from
the investment in bank-owned life insurance and tax-free municipal securities
and loans, as well as historic tax credits attributable to the remodeling of the
Corporation's headquarters. Also contributing was a decrease in the
Corporation's pre-tax earnings base between the third quarter 2004 and 2003.
12
COMPARISON OF RESULTS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003
GENERAL. Net income for the nine months ended September 30, 2004 decreased
$45,000 or 2.5% to $1.77 million from $1.82 million for the nine months ended
September 30, 2003. This decrease was a result of a decrease in net interest
income of $362,000 and an increase in noninterest expense of $249,000.
Offsetting these unfavorable variances were decreases in the provision for loan
losses and income taxes of $55,000 and $252,000, respectively, and an increase
in noninterest income of $259,000.
NET INTEREST INCOME. Net interest income on a tax equivalent basis decreased
$351,000 or 4.8% to $6.9 million for the nine months ended September 30, 2004
from $7.3 million for the same period in 2003. This net decrease can be
attributed to a decrease in interest income of $205,000 coupled with an increase
in interest expense of $146,000.
INTEREST INCOME. Interest income on a tax equivalent basis decreased $205,000 or
1.9% to $10.7 million for the nine months ended September 30, 2004, compared to
$10.9 million for the same period in the prior year. This decrease in interest
income can be attributed to a 47 basis point decline in the interest rate on
average interest-earning assets to 5.82% during the nine months ended September
30, 2004, compared to 6.29% for the same period in the prior year. The yield on
average loans, securities and interest-bearing cash equivalents decreased to
6.37%, 4.30% and 1.60%, respectively, during the nine months ended September 30,
2004, compared to 6.83%, 4.78% and 2.08%, respectively, for the same period in
the prior year. The decrease in interest income due to rate was offset by an
increase in the average balance of interest-earning assets, as average loans
receivable, securities and interest-bearing cash equivalents increased to $187.4
million, $53.8 million and $5.1 million, respectively, during the nine months
ended September 30, 2004, compared to $176.1 million, $52.3 million and $4.1
million, respectively, during the same period in the prior year. Increases in
average loans, securities and interest-bearing cash equivalents between the
quarterly periods were funded by deposit growth and borrowed funds. See comments
in the "Changes in Financial Condition" section above for discussion of security
and deposit growth factors.
INTEREST EXPENSE. Interest expense increased $146,000 or 4.0% to $3.8 million
for the nine months ended September 30, 2004, compared to $3.7 million for the
same period in the prior year. This increase in interest expense can be
attributed to an increase in the average balance of interest-bearing
liabilities, as average interest-bearing deposits and borrowed funds increased
to $186.3 million and $15.7 million, respectively, during the nine months ended
September 30, 2004, compared to $175.5 million and $13.1 million, respectively,
during the same period in the prior year. The increase in interest expense due
to volume was partially offset by an 8 basis point decline in the interest rate
on average interest-bearing liabilities to 2.51% during the nine months ended
September 30, 2004, compared to 2.59% for the same period in the prior year. The
average cost of deposits decreased to 2.11% during the nine months ended
September 30, 2004, compared to 2.18% for the same period in the prior year.
13
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS. The following table sets forth,
for 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.
- --------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
--------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
- ------------------------
Loans, taxable $ 179,929 $ 8,578 6.37% $ 170,433 $ 8,732 6.85%
Loans, tax exempt 7,426 352 6.33% 5,659 264 6.24%
--------- ------- ------- --------- -------- ---------
Total Loans Receivable $ 187,355 $ 8,930 6.37% $ 176,092 $ 8,996 6.83%
--------- ------- ------- --------- -------- ---------
Securities, taxable 38,495 990 3.44% 36,015 1,076 3.99%
Securities, tax exempt 15,330 742 6.46% 16,254 793 6.52%
--------- ------- ------- --------- -------- ---------
TOTAL SECURITIES 53,825 1,732 4.30% 52,269 1,869 4.78%
--------- ------- ------- --------- -------- ---------
Interest-earning cash equivalents 3,331 32 1.28% 2,414 24 1.33%
Federal bank stocks 1,763 29 2.20% 1,642 39 3.18%
--------- ------- ------- --------- -------- ---------
TOTAL INTEREST-BEARING CASH EQUIVALENTS 5,094 61 1.60% 4,056 63 2.08%
--------- ------- ------- --------- -------- ---------
TOTAL INTEREST-EARNING ASSETS 246,274 10,723 5.82% 232,417 10,928 6.29%
Cash and due from banks 7,007 6,021
Other noninterest-earning assets 11,904 10,449
--------- ---------
Total assets $ 265,185 $ 248,887
========= =========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 76,373 $ 318 0.56% $ 76,477 $ 458 0.80%
Time deposits 109,894 3,004 3.65% 99,057 2,828 3.82%
--------- ------- --------- --------- -------- ---------
TOTAL INTEREST-BEARING DEPOSITS 186,267 3,322 2.38% 175,534 3,286 2.50%
--------- ------- --------- --------- -------- ---------
Borrowed funds, term 15,000 470 4.19% 12,000 356 3.97%
Borrowed funds, overnight 672 5 0.99% 1,108 9 1.09%
--------- ------- --------- --------- -------- ---------
TOTAL BORROWED FUNDS 15,672 475 4.05% 13,108 365 3.72%
--------- ------- --------- --------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES 201,939 3,797 2.51% 188,642 3,651 2.59%
Noninterest-bearing demand deposits 38,326 - - 35,686 -
--------- ------- --------- --------- -------- ---------
FUNDING AND COST OF FUNDS 240,265 3,797 2.11% 224,328 3,651 2.18%
Other noninterest-bearing liabilities 2,016 1,758
--------- ---------
Total liabilities 242,281 226,086
Stockholders' equity 22,904 22,801
---------- ---------
Total liabilities and stockholders'
equity $ 265,185 $ 3,797 2.11% $ 248,887 $ 3,651
========== ------- ========= --------
NET INTEREST INCOME $ 6,926 $ 7,277
======= ========
INTEREST RATE SPREAD (difference between 3.30% 3.70%
weighted average rate on interest-earning ======= =======
assets and interest-bearing liabilities)
Net interest margin (net interest 3.76% 4.19%
income as a percentage of average ======= =======
interest-earning assets)
- -------------------------------------------------------------------------------------------------------------------
14
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.
- -----------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 VERSUS 2003
INCREASE (DECREASE) DUE TO
-----------------------------------------------------
VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 557 $ (623) $ (66)
Securities 54 (192) (138)
Interest-earning cash
equivalents 9 (1) 8
Federal bank stocks 3 (13) (10)
----- ----- -----
Total interest-earning assets 623 (829) (206)
----- ----- -----
INTEREST EXPENSE:
Deposits 196 (160) 36
Borrowed funds 76 34 110
----- ----- -----
Total interest-bearing liabilities 272 (126) 146
----- ----- -----
NET INTEREST INCOME $ 351 $ (703) $ (352)
===== ===== =====
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 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 is as follows:
- -------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
-------------- ------------ ------------
2004 2003 2003
- -------------------------------------------------------------------------------------------------------
Balance at the beginning of the period $ 1,777 $ 1,587 1,587
Provision for Loan Losses 170 225 330
Charge-Offs (273) (154) (205)
Recoveries 42 47 65
------- ------- -------
Balance at the end of the period $ 1,716 $ 1,705 $ 1,777
======= ======= =======
Non-performing loans $ 1,244 $ 1,650 $ 1,329
Non-performing assets 1,314 1,650 1,374
Non-performing loans to total loans 0.67% 0.89% 0.69%
Non-performing assets to total assets 0.49% 0.65% 0.52%
Allowance for loan losses to total loans 0.93% 0.92% 0.92%
Allowance for loan losses to non-performing loans 137.94% 103.33% 133.71%
- -------------------------------------------------------------------------------------------------------
15
The provision for loan losses decreased $55,000 or 24.4% to $170,000 for the
nine month period ending September 30, 2004 from $225,000 for the same period in
the prior year. The decrease in the actual allowance level of $61,000 or 3.4% to
$1.72 million at September 30, 2004 from $1.78 million at December 31, 2003 was
a result of the decrease in loans receivable of $6.7 million offset by an
increase in charged-off loans and a decrease in recoveries. Nonperforming loans
also decreased $85,000 or 6.4% to $1.2 million at September 30, 2004 from $1.3
million at December 31, 2003. This was primarily a result of the change in the
status of two commercial mortgages from nonperforming to performing and the
restructure of a commercial customer relationship which is now considered
performing.
NONINTEREST INCOME. Noninterest income increased $259,000 or 19.7% to $1.6
million during the nine months ended September 30, 2004, compared to $1.3
million during the same period in the prior year. This increase can be
attributed to the increase in customer service fees, commissions, gains on the
sale of marketable equity securities and loans held for sale and other
noninterest income of $59,000, $11,000, $142,000, $14,000 and $41,000,
respectively. The increase in customer service fees was a result of the increase
in the overdraft fees and also the increase in the number of accounts. Also
contributing to the increase in noninterest income was the increase in
commissions earned of $11,000 resulting from the addition of the investment
advisory services in July 2004. The increase in gains on loans sold of $34,000
was the result of the sale of our student loan portfolio in September 2004.
Offsetting this favorable variance was a decrease in earnings on bank-owned life
insurance of $8,000.
NONINTEREST EXPENSE. Noninterest expense increased $249,000 or 4.4% to $5.9
million during the nine months ended September 30, 2004, compared to $5.7
million during the same period in the prior year. This increase in noninterest
expense can be attributed to increases in compensation and benefits, premises
and equipment expense and other noninterest expense of $61,000, $133,000 and
$137,000, respectively. This unfavorable variance was offset by a decrease in
intangible amortization expense of $82,000.
Compensation and employee benefits expense increased $61,000 to $3.3 million
during the nine months ended September 30, 2004, compared to $3.2 million for
the same period in the prior year. Contributing to this variance were increases
in employee and officer salaries, payroll taxes, employee insurance and
directors fees. Offsetting this unfavorable variance was the decrease in
employee retirement costs, training expenses, employee incentive costs and
deferred loan fees associated with salaries.
Premises and equipment expense increased $133,000 or 16.9% to $919,000 during
the nine months ended September 30, 2004, compared to $786,000 for the same
period in the prior year. This increase can be primarily attributed to increased
building and equipment depreciation expenses and other building and equipment
expenses of $21,000, $83,000, $11,000 and $19,000, respectively. Contributing to
the increases in depreciation expenses between the two periods was the
completion of the construction on the main office building during the fourth
quarter of 2003 and the addition of a new mainframe and imaging system in
January 2004. Partially offsetting this increase between the two periods was the
decrease in office rent and utilities of $17,000 and $3,000, respectively. The
decrease in office rent is a direct result of the closing of our Clarion Mall
office in March 2003.
Intangible amortization expense decreased $82,000 or 76.6% to $25,000 during the
nine months ended September 30, 2004, compared to $107,000 for the same period
in the prior year. This variance was a result of the cessation of amortization
expense on three branches previously acquired which were fully amortized in the
fourth quarter of 2003. Offsetting this decrease was an increase in the
amortization of $1,000 for the newly acquired customer relationship intangible
associated with the addition of the investment advisory services (see comments
in Changes in Financial Condition above) in July 2004.
Other noninterest expense increased $137,000 or 8.7% to $1.7 million during the
nine months ended September 30, 2004, compared to $1.6 million for the same
period in the prior year. This increase can be attributed primarily to increases
in professional fees, telephone and communication expenses, Pennsylvania use tax
expense, software depreciation and correspondent/courier fees. Partially
offsetting these unfavorable variances were decreases in Pennsylvania shares
taxes, travel and entertainment expenses and postage expenses between the two
periods.
16
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $252,000 or
43.1% to $333,000 for the nine months ended September 30, 2004, compared to
$585,000 for the same period in the prior year. Contributing to this favorable
variance was the decrease in the Corporation's effective tax rate resulting from
the investment in bank-owned life insurance and tax-free municipal securities
and loans, as well as historic tax credits attributable to the remodeling of the
Corporation's headquarters. Also contributing was a decrease in the
Corporation's pre-tax earnings base between the nine month period ending
September 30, 2004 and 2003.
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, 2004, the Corporation used its sources of funds primarily to
purchase securities and payoff overnight borrowings from the FHLB. As of such
date, the Corporation had outstanding loan commitments, including undisbursed
loans and amounts available under credit lines, totaling $16.4 million, and
standby letters of credit totaling $644,000.
At September 30, 2004, time deposits amounted to $112.3 million or 48.8% of the
Corporation's total consolidated deposits, including approximately $43.4
million, which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a term borrowing capacity from the FHLB and, to a limited and rare extent,
the sale of loans. At September 30, 2004, the Corporation's borrowing capacity
with the FHLB, net of funds borrowed, was $92.7 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Corporation is comprised primarily from interest rate risk
exposure and liquidity risk. Since virtually all of the interest-earning assets
and paying liabilities are at the Bank, virtually all of the interest rate risk
and liquidity risk lies at the Bank level. The Bank is not subject to currency
exchange risk or commodity price risk, and has no trading portfolio, and
therefore, is not subject to any trading risk. In addition, the Bank does not
participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets. Interest rate risk and
liquidity risk management is performed at the Bank level. Although the Bank has
a diversified loan portfolio, loans outstanding to individuals and businesses
depend upon the local economic conditions in the immediate trade area.
One of the primary functions of the Corporation's asset/liability management
committee is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the asset/liability committee is to manage the
relationship between interest rate sensitive assets and liabilities, thereby
minimizing the fluctuations in the net interest margin, which achieves
consistent growth of net interest income during periods of changing interest
rates.
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of the bank's rate sensitive assets and rate sensitive
liabilities. These differences, or interest rate repricing "gap", provide an
indication of the extent that the Corporation's net interest income is affected
by future changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest
rate-sensitive liabilities and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income. Conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The closer to zero that gap is maintained, generally, the lesser the impact of
market interest rate changes on net interest income.
At September 30, 2004, the Corporation's interest-earning assets maturing or
repricing within one year totaled $85.6 million while the Corporation's
interest-bearing liabilities maturing or repricing within one-year totaled
$123.2 million, providing an excess of interest-bearing liabilities over
interest-earning assets of $37.7 million or a negative 13.9% of total assets. At
September 30, 2004, the percentage of the Corporation's assets to liabilities
maturing or repricing within one year was 69.4%.
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, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Corporation's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Corporation's management, including its
Chief Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e).
As of the quarter ended September 30, 2004, the Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Principal Financial and Accounting Officer, of the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures.
Based on the foregoing, the Corporation's Chief Executive Officer and Principal
Financial and Accounting Officer concluded that the Corporation's disclosure
controls and procedures were effective.
There have been no significant changes in the Corporation's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Corporation completed its evaluation.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
EXHIBIT 31.2 Rule 13a-14(a) Certification of Principal Financial and
Accounting Officer EXHIBIT 32.1 CEO Certification Pursuant to 18 U.S.C.
Section 1350 EXHIBIT 32.2 PFO Certification Pursuant to 18 U.S.C.
Section 1350
(B) REPORTS ON FORM 8-K
The Corporation filed a Form 8-K dated October 22, 2004 to announce
third quarter 2004 earnings. The Corporation filed a Form 8-K dated
October 26, 2004 to announce the election and retirement of Directors.
19
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 10, 2004 BY: /S/ DAVID L. COX
--------------------------------------------
David L. Cox
Chairman of the Board,
President and Chief Executive Officer
Date: November 10, 2004 BY: /S/ SHELLY L. RHOADES
--------------------------------------------
Treasurer
(Principal Financial and Accounting Officer)
20